Oil hits two-year high, dollar falls on war fears

Oil hits two-year high, dollar falls on war fears

Nigel Stephenson Reuters London

Oil prices hit fresh two-year highs, gold kept its luster and the dollar fell on Monday after the U.S. sent more forces to the Gulf for a possible strike against Iraq, ratcheting up fears of war.

Stepping up pressure on Baghdad, the U.S. dispatched more troops, aircraft and ships to the Gulf as United Nations weapons inspectors searched for signs of banned Iraqi weapons of mass destruction.

Oil prices rose around the globe on fears of supply disruption from war in the Middle East and as Venezuelan production remained choked by a strike.

"We're seeing a continuation of the bull run from the last two weeks. The Venezuelan strike is still on, Saudi Arabia looks like it will let the U.S. use its airbases for an attack on Iraq and the market appears to be pricing any attack into March," said a broker in New York.

Brent crude for February delivery was last at $30.57 a barrel, up 41 cents. U.S. crude hit $33.17 a barrel, up 45 cents from Friday's close and its highest since December 1, 2000. March futures prices were also higher.

The killing of three American doctors in Yemen and the arrest of a baggage handler at Paris's main airport after guns, explosives and detonators were found in his car, also helped keep the price of gold within sight of six-year highs.

Gold, a safe haven in troubled times, was fixed in the London session at $348.50 an ounce, down from Friday's $349.30, which was the highest since April 1997.

The dollar fell to a three-year low against the euro and a six-week low against the yen, with anxieties over North Korea's nuclear plans also weighing on the market.

"The market is still focused on the possibility of a strike against Iraq in the early part of next year and also tension with North Korea over its nuclear program," said Ryan Shea, senior international economist at Bank One in London.

The dollar was last at 119.32 yen, down nearly half a yen in early European trade and at $1.0424 to the euro, off an earlier three-year high of $1.0445.

The tension over North Korea hit stocks in neighboring South Korea. Tokyo stocks, which do not trade on Tuesday, finished 2002 at their lowest year-end level in 20 years.

The Nikkei closed down 1.55 percent on the day.

However, European shares rose slightly, helped by gains for German automaker DaimlerChrysler and oil stocks.

DaimlerChrysler was supported by news over the weekend that its Mercedes unit expects 2002 sales at least to have matched those of last year.

The FTSE Eurotop 300 index of pan-European blue chips was up just 0.4 percent while the narrower DJ Euro STOXX 50 was down 0.19 percent.

"You could argue that there can't be any more negative surprises but if you go through the list of worries such as economic growth, Iraq, oil prices and dollar-euro, there is nothing to get enthused or bullish about in that list," said Chris Johns, global strategist at ABN AMRO.

European stocks opened lower after U.S. stocks fell on Friday but U.S. stock index futures were higher on Monday, indicating Wall Street would open firmer.

Euro zone government bonds were well supported by the geopolitical tensions and futures opened at contract highs. However, traders said investors saw this as an opportunity to take profits before the year-end.

The two-year German Schatz note yield, which moves in the opposite direction to the price, was up 2.1 basis points at 2.741 percent after hitting 2.704 percent on Friday, its lowest since May 1999.

The 10-year German Bund was yielding 4.213 percent, up 1.6 basis points.