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Crude prices fall on dollar's rise
Friday August 8, 10:17 am ET
By David Goldman, CNNMoney.com staff writer

Oil prices tumbled Friday as the dollar rallied strongly against slumping foreign currencies and concerns about a Turkish supply disruption were eased.

Light, sweet crude for September delivery lost $4.03 to $115.99 a barrel in electronic trading on the New York Mercantile Exchange.

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Crude reversed course after settling higher Thursday, following decisions by the European Central Bank and the Bank of England to hold key interest rates steady. ECB President Jean-Claude Trichet said the decision to keep rates at 4.25% came as inflation remains a concern, though the European economic growth outlook was gloomy.

"Looking ahead, based on the current prices for futures commodities, the ... annual inflation rate is likely to remain well above a level consistent" with the bank's goal "for quite some time," Trichet said.

That sent the dollar soaring against the euro, pound and yen, and oil prices sank. Like all dollar-traded commodities, oil prices tend to fall when the U.S. currency rises. A stronger dollar makes oil more expensive for foreign investors.

"So much of the buying we saw since last August when oil was trading at $68 a barrel was predicated on a weak dollar," said Peter Beutel, an oil analyst with Cameron Hanover Oil. "As the dollar is gaining now, we're seeing an unwinding of those positions in oil."

In the recently slumping U.S. economy, many investors used the commodity as a hedge against inflation when the dollar has fallen. But as the dollar begins to rebound, investors have shifted their money to other investments such as stocks and bonds.

"There's no reason why we can't see an unwinding of positions back to the $68 to $79 level," said Beutel. "This market can always go further and faster than anyone will believe."

Oil has fallen nearly $31 or 20% from the record high of $147.27 hit set July 11.

Dollar surges: The 15-nation euro bought $1.5017, down 2% from Thursday's levels, sending the dollar a five-month high against the European currency.

The British pound fell 1.4% to a 17-month low of $1.9164, and the dollar rose 0.8% against the Japanese currency to ¥110.275.

"The dollar is strengthening on the perceived potential weakness in the rest of the globe," said Dustin Reed, senior currency strategist with ABN Ambro. "Trichet typically does not talk like that."

Pipeline fixed: Crude bounced off a three-month low Thursday to settle more than $1 higher after Turkey's Baku-Tbilisi-Ceyhan oil pipeline was attacked by a Kurdish rebel group Tuesday night. Reports emerged Thursday that the pipeline, which pumps nearly 1 million barrels a day, could remain closed for up to two weeks.

But Friday reports emerged that the oil had been rerouted over other pipelines. That news helped send crude even lower, as supply concerns were eased.

Gas prices: The average price of gasoline fell 1.3 cents to $3.836 per gallon in the United States, declining for the 22nd straight day, according to a daily survey from motorist advocacy group AAA. Gas is down nearly 7% from the record high of $4.114 set July 16.