Falling oil hits Europe stocks; dollar surges

Tumbling oil prices dragged most European stock markets down by hitting heavily weighted oil shares on Wednesday, although a U.S. Treasury-boosting rebound in the dollar was a major plus for the region's exporters.

U.S. light crude fell to as low as $40.45 a barrel and has now sunk more than 27 percent from October's record high, after swing producer Saudi Arabia questioned the need for output cutbacks ahead of Friday's OPEC policy review.

U.S. shares were seen opening broadly flat after falling sharply on Tuesday as the lower oil price dragged down U.S. oil majors such as Exxon Mobil Corp.

Mild winter weather in the United States and expectations that data at 1530 GMT will show another rise in U.S. heating fuel inventories were seen keeping oil on a slippery slope and bashed stocks such as BP and Total.

"There was a lot of anticipation of tight stocks and that inventories would get squeezed further but the cold weather hasn't materialised yet and we're in December. That's taken a lot of air out of the market," said John Brady at brokers ABN AMRO.

Mining and metal stocks such as Rio Tinto and Arcelor were also pressured after copper prices slumped to 5-week low and gold sank about $10 to less than $438 a troy ounce in the response to the recovering dollar.

The euro was quoted at $1.3220 against the greenback, having touched a record high of $1.3470 on Tuesday, and changed hands for about 104.70 yen.

The FTSEurofirst 300 index of leading European shares slipped 0.25 percent to 1,033 points.

Italy's MIB30 share index bucked the weaker trend as equity investors cheered Telecom Italia's debt-financed plan to buy out its remaining shares in mobile phone arm TIM.

Dollar revival

The dollar rallied against rival currencies on end-of-year book-squaring and as forex dealers zoomed-in on the relatively weak economic outlook outside of the United States and scaled back expectations for non-U.S. interest rate rises.

Currency strategists at Dresdner Kleinwort Wasserstein said European managers of international bond funds had turned negative towards the euro after Friday's weak U.S. jobs data and taken profits on their previous long positions.

"With the end of the year in sight this part of the market is unlikely to add fresh risk to their portfolios," they said in a note to clients.

The dollar also made sharp gains against traditional commodity-based and higher-yielding Australian and Canadian dollars after the Reserve Bank of Australia followed the Bank of Canada by standing pat on interest rates.

Euro zone government bond yields were slightly higher after a 7 billion euro-auction of 2-year German paper met with slightly reduced demand and as investors took profits on this week's hefty price gains.

U.S. Treasury prices jumped as the dollar gains encouraged some buying ahead of a $15 billion sale of 5-year bonds. U.S. Treasury 10-year yields were trading at around 4.17 percent and comparable euro zone debt yielded 3.69 percent, just off 17 month lows.

Technology stocks were under a little pressure after Texas Instruments, the world's largest maker of chips for cell phones, said it expected Q4 revenue and earnings per share at the mid range of its previous estimates and said order trends remained soft.

In Japan, the Nikkei average ended higher as auto groups rose on the back of three-month low oil prices.

REUTERS

1425 081204 GMT