* Dollar weakness propels copper as much as 3 percent
* Worries over high copper inventories limit gains
* Fourth-quarter outlook for metals promising (Recasts, updates prices to close of U.S. session; adds NEW YORK to dateline, new byline)
By Barani Krishnan and Michael Taylor
NEW YORK/LONDON, Sept 22 (Reuters) - The dollar's return to one-year lows saw copper futures rallying as much as 3 percent on Tuesday, before worries over high inventories of the base metal led the market to settle off the session's highs.
Copper for December delivery HGZ9 ended up 2 percent, or 5.90 cents, at $2.8645 a lb on the New York Mercantile Exchange's COMEX division. The intraday peak was $2.8920, up 3 percent from Monday's close.
Copper for three month delivery MCU3 on the London Metal Exchange ended at $6,270 a tonne from $6,190 at the close on Monday. In the previous session, the metal, used in power and construction, hit a 2-1/2 week low at $6,050.
"It's all dollar-related trades at this point, on the view that the economy is revving itself back and investor appetite is returning," said Frank McGhee, trader with Integrated Brokerage Services LLC in Chicago.
The dollar slid to a one-year low of just over $1.48 against the euro as crumbling sentiment on the U.S. currency prompted selling ahead of a Federal Reserve meeting and Group of 20 summit this week. [USD/]
Aside from naturally creating inflationary pressure in dollar-denominated commodities, a weak dollar also makes raw materials such as copper more attractive to users of other currencies such as the euro.
But some analysts said prices of copper, which have doubled since the end of 2008, appear to be rising with scant regard for demand, as evidenced by creeping inventories of the metal on the LME.
"The dollar seems to be pushing all commodity markets," VTB Capital analyst Andrey Kryuchenkov said. "Everybody expects a good fourth quarter (but) we're not out of the woods yet ... There is no demand in the short term. Nobody is actually buying."
Latest customs data from China showed August imports of refined copper fell by a quarter from July, as expected. For a graphic showing China's copper imports, click: here
"The Chinese won't be buying at these prices. They need to use up whatever stocks they have. For copper to break $6,500, we'll need to see fundamental demand. I don't think you can break that on sentiment and the dollar," said Kryuchenkov.
Latest data showed on copper stocks in LME warehouses having fallen 50 tonnes to 331,775 tonnes, although they remained near levels not seen since late May. Stocks have now gained about 30 percent since the middle of July. <LME/STX1>
For a graphic of seasonal trends in copper stocks, click: here
Copper inventories in warehouses monitored by the Shanghai futures exchange (SHFE) rose 7 percent to 104,248 tonnes from the previous week, data showed on Friday. [ID:nBJD003058]
PROMISING OUTLOOK FOR Q4
But other analysts feel the weak dollar alone will be able to drive commodities higher, until economic growth catches up.
They also cite improving macroeconomic data that signaled the recession was coming to an end. For example, U.S. single-family home prices rose 0.3 percent in July from June. [ID:nN22339690]
"When we start coming into the fourth quarter, providing we continue to see positive data releases, then I see every reason for prices to be supportive," said David Wilson, director of metals research at Societe Generale.
In other metals, aluminium MAL3 ended at $1,889 a tonne against $1,884. LME stocks of the metal, used in transport and packaging, fell 4,825 tonnes but remained near record levels above 4.6 million tonnes.
Steel-making ingredient nickel MNI3 closed at $17,750 from $17,400 while battery material lead MPB3 ended at $2,289 from $2,215.
Zinc MZN3 ended at $1,946 a tonne from $1,919 and tin MSN3 was last bid at $14,650 from $14,450.
Metal Prices at 1612 GMT: Metal Last Change Pct Move End 2008 Ytd Pct move COMEX Cu 284.05 4.80 +1.72 139.50 103.62 LME Alum 1885.00 1.00 +0.05 1535.00 22.80 LME Cu 6265.00 75.00 +1.21 3060.00 104.74 LME Lead 2300.00 85.00 +3.84 999.00 130.23 LME Nickel 17875.00 75.00 +2.73 11700.00 52.78 LME Tin 14625.00 -175.00 -1.18 10700.00 36.68 LME Zinc 1930.00 18.00 +0.94 1208.00 59.77 SHFE Alu 14925.00 -50.00 -0.33 11540.00 29.33 SHFE Cu* 48650.00 -130.00 -0.27 23840.00 104.07 SHFE Zin 15280.00 -75.00 -0.49 10120.00 50.99 ** 1st contract month for COMEX copper * 3rd contract month for SHFE AL, CU and ZN SHFE ZN began trading on 26/3/07