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* Oil at 3-1/2-year high as Trump move threatens global supply
* World stocks rise, lifted by the energy sector
* Dollar hits new 2018 high before edging lower
By Herbert Lash
NEW YORK, May 9 (Reuters) - Crude oil prices rose to 3-1/2-year highs on Wednesday following President Donald Trump’s decision to withdraw the United States from a nuclear deal with Iran, a move that helped lift equity markets as Exxon Mobil, Chevron and other oil majors rallied.
Contracts for Brent, the global crude benchmark, and for the U.S. benchmark jumped almost 3 percent to highs last seen in November 2014 after Trump on Tuesday abandoned the deal and announced the “highest level” of sanctions against Iran.
Trump’s move raises the risk of conflict in the Middle East and casts uncertainty over oil supplies in an already tight market.
U.S. crude rose $1.95 to $71.01 per barrel and Brent was last at $77.09, up $2.24.
The energy sector in equity markets rallied, helping lift European stocks, a gauge of world equity performance and the broad U.S. market on Wall Street.
“It’s the clear leader today. It’s overwhelming almost all the other sectors in terms of its impact on today’s market action,” said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.
Exxon Mobil rose 1.65 percent, Chevron gained 1.36 percent, Royal Dutch Shell rose 3.38 percent and BP rose 3.92 percent.
While crude oil prices have rallied over the past 12 months, energy stocks have basically gone nowhere, which is helping their gains on Wednesday, Arone said.
“Now we’re starting to see that gap close, so this could be a bit of a short-term rally for the energy sector,” he said.
MSCI’s gauge of equity performance in 47 countries gained 0.25 percent, with Exxon and BP the second- and third-largest contributors.
Energy added the most points to the pan-European FTSEurofirst 300 index of regional stocks, rising 0.65 percent with Royal Dutch Shell and BP leading shares higher.
On Wall Street, stocks traded higher to mixed, but the S&P energy sector gained 2.1 percent, led by Exxon Mobil.
The Dow Jones Industrial Average rose 10.19 points, or 0.04 percent, to 24,370.4. the S&P 500 gained 6.71 points, or 0.25 percent, to 2,678.63 and the Nasdaq Composite added 6.72 points, or 0.09 percent, to 7,273.62.
Equities have traded in a range recently on concerns about U.S.-China trade negotiations, a disparate view by the Federal Reserve and investors over inflation and the economy, and the notion that earnings and growth have peaked, Arone said.
“Those things certainly have the market in a bit of a sideways pattern,” he said.
The dollar fell from its strongest levels in 2018 against a basket of currencies due to mild profit-taking, but the greenback was expected to resume its rise due to solid U.S. economic growth and further monetary tightening by the Fed.
The weaker dollar stemmed from a bounce in the euro, which hit a fresh low for the year in early trading before paring gains.
“There’s a little exhaustion with the long-dollar trade, but I don’t think we’ve reached the end of it yet,” said Ilya Gofshteyn, FX and global macro strategist at Standard Chartered Bank in New York.
The dollar index fell 0.09 percent, with the euro down 0.03 percent to $1.1859. The Japanese yen weakened 0.53 percent versus the greenback at 109.72 per dollar.
U.S. government bond yields fell across maturities as demand for safe-haven assets increased after Trump’s Iran announcement.
Benchmark 10-year notes fell 8/32 in price, pushing their yield up to 2.9986 percent.
In Europe, the gap between Italian and German borrowing costs hit its widest in nearly six weeks on the possibility that a coalition of Italian anti-establishment parties would come to power.
The Italy/Germany 10-year government bond yield spread widened five basis points immediately after news that 5-Star and the League had said they were holding last-minute talks to try to clinch a coalition deal.
The spread widened to 132.7 basis points, its widest since March 29. (Reporting by Herbert Lash Editing by James Dalgleish)