LONDON Copper fell to a one-week low on Wednesday, retreating from its highest levels since February as disappointment over the U.S. Federal Reserve's retreat from another round of monetary stimulus seeped through financial markets, while traders pared back risk ahead of the Easter break.
Three-month copper on the London Metal Exchange fell 3.1 percent to close at $8,350 a tonne from $8,615 on Tuesday, when it rallied to a near two month high above $8,700 a tonne.
"The dimmed prospects for U.S. easing seem to be the main driver, also via the dollar, so we've seen some liquidation come through on copper today," analyst Robin Bhar of Societe Generale said.
Minutes from the Fed's March meet showed less support for more easing, or bond-buying, in the face of improved economic data, which lifted the dollar and hit stocks in the United States, Asia and Europe.
The dollar gained further strength after European Central Bank President Mario Draghi said the euro zone economic outlook is subject to downside risks relating to the debt crisis and commodity prices, which dented the euro. <USD/>
A stronger dollar makes dollar-priced commodities like copper more expensive for holders of other currencies.
"Some of that could be to do with position squaring, with the LME off on Friday and Monday. There's a few event risks in the next few days, like U.S. March payrolls on Friday. Also, China has been away for a few days so when they return tomorrow, they may see an opportunity to sell," Bhar added.
LME trading volumes were thin in a holiday shortened week. Chinese markets will return on Thursday following a three-day break, while markets in many other countries will be shut on Friday for the Easter weekend.
"There was new risk coming in on Monday, mostly copper, nickel and lead, but they have since reversed lower and I think those longs are getting back out," a London-based trader said.
Copper, used in construction and seen as an economic bellwether, is up more than 10 percent so far this year and remains above the 200-day moving average of $8,318.
Copper was also underpinned by the central bank of Chile, the world's largest copper producing country, raising its forecast for this year's copper export price to $3.70 per lb from the $3.50 forecast in December.
There was more evidence of a gradually recovering U.S. economy on Tuesday as data showed new orders for U.S. factory goods bounced back 1.3 percent in February, although the figures were a little off market expectations.
Analysts expect the momentum to be sustained, seeing a fourth month of solid jobs growth in the United States in March when the nonfarm payrolls data is released on Friday, however the market reaction may be heightened due to a lack of liquidity due to the holidays.
WILL THEY, WON'T THEY?
Three-months nickel, a big gainer on Tuesday on renewed Indonesian export tax concerns, shed 3 percent to close at $17,855 from $18,450 at the close on Tuesday.
An Indonesian industry ministry official said on Tuesday the country plans to impose a 25 percent export tax on coal and base metals this year, jumping to 50 percent in 2013, as it looks to boost domestic investment and take a bigger slice of mining profits.
Indonesia is a major exporter of nickel and tin.
"The 'will they, won't they' conundrum of an Indonesian export tax on unprocessed minerals reared its head again on Tuesday, having been put on hold last week," Macquarie said in a research note.
"The situation is undoubtedly confusing, and we consider the imposition of the tax a low to moderate possibility, but undoubtedly the market risk is rising."
Tin and LME zinc fell by nearly two percent, with tin closing at $22,600 from $23,025 at Tuesday's close. Zinc finished at $1,982 from $2,020, while lead dropped by 2.8 percent to $2,012.50 from $2,070.
Aluminium ended at $2,093 from $2,125, having fallen to its lowest since early January at $2,087.50 due to a supply glut.
"(Aluminium) has moved into an oversold condition leaving open the possibility for periodic short covering rallies. With that said downside support does not come in until 2080-2070 followed by 2000," RBC Capital said in a note.
(Editing by Anthony Barker)