Oil drops in biggest loss since April, dollar up

Investors chat in front of an electronic board showing stock information at a brokerage house in Wuhan, Hubei province July 27, 2009.

NEW YORK (Reuters) - Oil fell nearly 6 percent on Wednesday in the biggest one-day slide since April after a big rise in U.S. crude inventories, while a plunge in Shanghai's stock market reignited the dollar's safe-haven appeal and helped to push U.S. shares lower.

The U.S. dollar climbed to a two-week high against the euro after a 5 percent drop in China's benchmark Shanghai Composite Index .SSEC and an unexpectedly weak U.S. durable goods report sparked a flight to safety..

The Reuters-Jefferies CRB index .CRB, which tracks 19 mostly U.S.-traded futures markets, fell 2.66 percent as investors questioned a commodity rebound over the past week on hopes the worst of the financial crisis was over.

Crude inventories jumped 5.1 million barrels in the week to July 24, according to government data, countering expectations for a decline. <EIA/S>

U.S. fuel consumption dropped 4.1 percent against year-ago levels over the past four weeks, while distillate stocks rose to the highest level in nearly 25 years.

"The build this week will put more pressure on oil, especially given that we were already seeing return of risk aversion across markets, with the U.S. dollar climbing and the stock market lower," said Rachel Ziemba, lead energy analyst for RGE Monitor in New York.

U.S. crude fell $3.88 to settle at $63.35 a barrel. London Brent fell $3.35 to $66.53 a barrel.

Shares of energy companies slid, with Chevron Corp (CVX.N) falling 1.8 percent, the biggest drag on the Dow. The S&P energy index .GSPE declined 2.1 percent.

The slide in Chinese stocks sapped investors' appetite for risk and helped the dollar index .DXY recover from its lowest level of 2009 while boosting the yen.

Both the yen and dollar benefit in times of risk aversion.

"The dollar is moving with the ebb and flow of risk appetite," said Samarjit Shankar, director of global strategy at Bank of New York Mellon in Boston.

"Today, risk is off and the dollar is gaining. It started with the collapse in Shanghai stocks, and people are wondering whether the foray into risk assets may have been overdone."

The dollar was up against a basket of major currencies, with the U.S. Dollar Index up 0.83 percent at 79.505.

The euro was down 0.97 percent at $1.4039, while against the yen, the dollar was up 0.60 percent at 95.11.

China's two biggest state-owned commercial banks capped their 2009 lending targets, according to domestic media reports, a move that will significantly slow Chinese credit growth during the remainder of the year.

Natural resources stocks tracked commodity prices down, with miner Freeport-McMoRan Copper & Gold Inc (FCX.N) off 5.2 percent. The S&P materials index .GSPM fell 2.1 percent.

"China has been a big driver of part of the global recovery. Their stimulus is direct and quick," said Bobby Harrington, managing director of Boston trading for UBS.

Slower growth in China's economy "could limit upside and create downward momentum" in the U.S. stock market, he said.

The Dow Jones industrial average .DJI closed down 26.00 points, or 0.29 percent, at 9,070.72. The Standard & Poor's 500 Index .SPX fell 4.47 points, or 0.46 percent, at 975.15. The Nasdaq Composite Index .IXIC slid 7.75 points, or 0.39 percent, at 1,967.76.

Shorter-dated U.S. Treasuries fell, with their yields briefly hitting five-week highs, after another poor auction this week heightened fears over waning appetite for U.S. government debt.

The weak bidding for a record $39 billion in five-year notes caused shorter-dated U.S. government debt prices to fall, but long-dated securities ended higher. They had climbed in response to a decline on Wall Street and the drop in U.S. durable goods.

The benchmark 10-year U.S. Treasury note was up 4/32 in price to yield 3.67 percent. The 2-year U.S. Treasury note was down 3/32 in price to yield 1.17 percent.

New York gold futures settled lower as metals prices were slammed after a second day of poor U.S. economic data suggested a drawn out recovery.

Weak demand for new cars and civilian aircraft pulled U.S. orders for costly durable goods down in June, even though an underlying trend of improved manufacturing activity continued.

Spot gold prices fell $7.45 to $929.20 an ounce.

Japanese shares gained but stocks in Australia and Hong Kong fell after strong run-ups in the past two weeks. The MSCI Asia-Pacific index excluding Japan .MIAPJ0000PUS fell 1.8 percent. In Tokyo, the Nikkei average .N225 edged up 0.3 percent to its highest close in seven weeks.

(Reporting by Ellis Mnyandu, Wanfeng Zhou, Chris Reese in New York; Brian Gorman, Joe Brock, Emelia Sithole-Matarise in London; writing by Herbert Lash; Editing by Kenneth Barry)