Oil up on Yemen unrest; USD dent by rate outlook

NEW YORK Tue Mar 22, 2011 4:48pm EDT

A man is reflected in a display showing the TOPIX stock index in Tokyo March 22, 2011. Japan's benchmark Nikkei average closed up 4.36 percent at 9,608.32 on Tuesday as reports of progress to contain radiation leaks at a quake-hit nuclear plant prompted investors to buy back risky assets. REUTERS/Michael Caronna

A man is reflected in a display showing the TOPIX stock index in Tokyo March 22, 2011. Japan's benchmark Nikkei average closed up 4.36 percent at 9,608.32 on Tuesday as reports of progress to contain radiation leaks at a quake-hit nuclear plant prompted investors to buy back risky assets.

Credit: Reuters/Michael Caronna

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NEW YORK (Reuters) - U.S. crude prices jumped on Tuesday as unrest in Yemen raised concerns about a further threat to supply and as the dollar traded near 15-month lows against major currencies.

Expectations that interest rates will rise in Europe before they do so in the United States weighed on the dollar. Although the euro eased back after hitting a 4-1/2-month high against the greenback, expectations of a euro zone rate hike next month could limit any downside for the single currency.

Camilla Sutton, senior currency strategist at Scotia Capital in Toronto said she expects the euro to test its November high versus the greenback.

"We believe that recent developments have all been negative for the U.S. dollar and positive for the euro," she said.

UK inflation data on Tuesday fueled expectations of a British rate hike in coming months, driving sterling to a 14-month high against the U.S. currency.

Stocks in the United States and Europe fell slightly, and trading volume was the lowest so far this year in Wall Street.

"As far as upward momentum, I don't think it's there anymore," said Terry Morris, senior equity manager at National Penn Investors Trust Company in Reading, Pennsylvania.

"So it's a wait-and-see attitude and not a lot of commitment from either side at this point."

With crude oil flows from Libya already crippled by a standoff between rebels and the government, worries over further supply disruptions rose as thousands of Yemeni protesters took to the streets clamoring for President Ali Abdullah Saleh to step down.

"The situation in the Middle East is still very bullish for oil," said Phil Flynn, analyst at PFGBEST Research in Chicago. "The unrest spreading on top of the conflict in Libya is still the market focus."

The Dow Jones industrial average .DJI dipped 17.90 points, or 0.15 percent, to 12,018.63. The Standard & Poor's 500 .SPX fell 4.61 points, or 0.36 percent, to 1,293.77. The Nasdaq Composite .IXIC lost 8.22 points, or 0.31 percent, to 2,683.87.

The MSCI global stocks index .MIWD00000PUS was up 0.36 percent, buoyed by an overnight 4.4 percent rise in Japanese stocks. U.S. dollar-denominated Nikkei futures edged 0.3 percent higher after posting losses for most of the U.S. session.

Europe's main equity benchmark .FTEU3 closed 0.06 percent lower after hitting a one-week high on Monday.

EURO RETREATS, CRUDE REVERSES LOSSES

The euro dipped after hitting $1.4249 versus the U.S. dollar, its highest level since November, as it ran into what traders said were options-related barriers.

Still, expectations that the European Central Bank will hike interest rates next month could limit any downside for the common currency.

"This, to me, is just a technical pullback," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey.

Gold was little changed as interest-rate hike expectations kept the market calm, but air strikes on Libya and escalating political unrest in the Middle East underpinned safe-haven demand.

U.S. oil prices rose 1.6 percent to $104.53 per barrel while Brent added 0.7 percent at $115.74.

Copper rose supported by the weaker dollar, but poor Chinese import data weighed on demand prospects.

Chinese data released on Monday showed lower-than-expected commodities imports for February.

China's rare earth metal export prices in February, however, were up almost ninefold from a year before, according to Reuters calculations based on Chinese data.

The rise in export values has coincided with a collapse in volumes coming out of China.

Shares in U.S. miner Molycorp (MCP.N), one of the few companies outside China that is well-placed to capitalize on the constriction in supply, jumped nearly 18 percent.

U.S. Treasuries were little changed in low volume as investors looked for further progress in Japan and the Middle East. Benchmark 10-year notes were last unchanged in price, yielding 3.33 percent.

(Additional reporting by Chuck Mikolajczak, Karen Brettell, Wanfeng Zhou, Joshua Schneyer and Tom Miles)

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