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* Oil soars to record $139.12 a barrel on U.S. jobs report
* U.S. stocks slide about 3 percent on stagflation fears
* Dollar slips, bonds rally on jump in unemployment rate
By Herbert Lash
NEW YORK, June 6 (Reuters) - Oil shot to a record $139 a
barrel on Friday, pushed lower by a falling dollar after a
report of the sharpest one-month rise in the U.S. unemployment
rate in 22 years sparked fears of 1970s-like stagflation and
led to a rout in global equities.
Oil zoomed past a record high set in May, marking its
biggest one-day gain in dollar terms ever, on dollar weakness
and tensions in the Middle East.
U.S. crude's <CLc1> dramatic $11 jump fueled concerns about
inflation and a reduction of spending power of American
consumers, whose layouts account for more than two-thirds of
the U.S. economy.
The dollar dropped across the board and U.S. government
debt rallied after data showed the unemployment rate shot up to
5.5 percent -- its highest in more than 3-1/2 years -- and the
U.S. economy lost jobs for a fifth straight month.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.93 percent at 72.362, and against
the yen, the dollar <JPY=> fell 0.94 percent at 104.92.
The euro <EUR=> rose 1.17 percent at $1.5767.
The evidence of further labor weakness and an almost 9
percent spike in oil prices triggered the decline in the dollar
the put in motion the oil rally, which rises when the U.S.
currency declines, and pushed stocks into a rout.
The Dow Jones industrial average <> fell 394.64 points,
or 3.13 percent, at 12,209.81. The Standard & Poor's 500 Index
<.SPX> slipped 43.37 points, or 3.09 percent, at 1,360.68. The
Nasdaq Composite Index <> slid 75.38 points, or 2.96
percent, at 2,474.56.
It was the Dow's biggest percentage decline since February
2007, and all 30 of its components fell.
The Labor Department data pared expectations the Federal
Reserve will raise short-term interest rates any time soon and
risk pushing a fragile economy into recession. That prospect
will likely keep the dollar weak and spur inflation.
"This is the worst economic environment," said Dave
Rovelli, managing director of U.S. equity trading at Canaccord
Adams in New York. "I don't see how this is not stagflation."
Slow growth and rising inflation ravaged the U.S. economy
in the 1970s and was called stagflation. The data ties the
hands of Federal Reserve Chairman Ben Bernanke, Adams said.
"It's a double-edged sword. If Bernanke raises rates to
fight inflation, he's going to really slow down the economy.
But if he doesn't raise rates like he said he was going to, the
dollar is going to go weak and that's why oil is going through
the roof."
The dollar's dimmed outlook and crude oil's spike came
after European Central Bank President Jean-Claude Trichet said
on Thursday the bank may hike interest rates as early as July
to stem growing inflationary pressures in the euro zone.
U.S. interest rate futures implied about a 56 percent
chance of a quarter percentage point hike in October, down from
a high of 82 percent shortly before the jobs data.
The benchmark 10-year U.S. Treasury note <US10YT=RR>
rose28/32 to yield 3.94 percent. The 30-year U.S. Treasury bond
<US30YT=RR> gained 47/32 to yield at 4.64 percent.
European stocks fell 1.9 percent to a seven-week closing
low after the U.S. payroll report, while U.S. equity markets
were off more than 2.5 percent.
Banks were among the biggest losers in Europe and financial
stocks led U.S. declines as investors fled stocks sensitive to
slower growth.
UBS <UBSN.VX> slipped 6.4 percent and Royal Bank of
Scotland <RBS.L> slid 5.2 percent, while insurer American
International Group <AIG.N>> fell 6.8 percent to a decade low
and financial services firm American Express Co <AXP.N> fell
5.9 percent.
The FTSEurofirst 300 <> index of top European shares
closed at 1,283.99 points, a closing level last seen in
mid-April. The index lost 3.7 percent during the week.
Airline shares were among the worst hit, with Air
France-KLM <AIRF.PA> down 6 percent in Europe and U.S. carriers
American Airlines, owned by AMR Corp <AMR.N> and Continental
Airlines both off about 8.7 percent.
Companies that promote alternative energy and drillers were
the biggest gainers.
European exporters such as automakers got hammered as the
euro gained against dollar. BMW <BMWG.DE> shed 4.4 percent and
Daimler <DAIGn.DE> fell 4.7 percent.
"This confirms that oil prices are closely following the
dollar and stocks are suffering from the spike, particularly
airlines. Just look at how their shares have been dumped," said
Jean-Francois Virolle, chief strategist at Global Equities in
Paris.
"Automakers are suffering too, hit from all sides: the
rising euro, rising steel prices, rising oil prices... while
outlook for consumer spending is gloomy."
Remarks by Israel's transport minister that an attack on
Iranian nuclear sites looked "unavoidable" and a Morgan Stanley
report predicting oil could reach a record high of $150 by July
4 also sent crude prices roaring upwards.
"We are calling for a short-term spike in oil prices," the
U.S. investment bank said.
U.S. crude <CLc1> settled up $10.75 at $138.54 a barrel
before touching an all-time high of $139.12. London Brent crude
<LCOc1> settled $10.15 higher at $137.69, off the record
$138.12 hit earlier.
New York gold futures jumped nearly 3 percent, ending at
just below $900 an ounce on a combination of record oil and the
dollar's drop.
The August gold contract <GCQ8> in New York settled up
$23.50 at $899.00 an ounce.
Euro zone government bond futures tested negative territory
as investors fled following a brief rally in the wake of the
U.S. employment report.
Japanese government bond prices sank after a sell-off in
European and U.S. bonds the previous day when Trichet's remarks
sparked investor jitters.
The yield of the benchmark 10-year Japanese government bond
<JP10YTN=JBTC>, which moves inversely to price, rose to 1.79
percent, just shy off a 10-month high.
Japan's Nikkei average <> climbed 1 percent to a
five-month closing high, and the MSCI index of Asia-Pacific
stocks outside Japan rose 0.8 percent <.MIAPJ0000PUS>.
(Reporting by Walker Simon, Gertrude Chavez-Dreyfuss, Richard
Leong in New York and Margaret Orgill in London. Editing by
Richard Satran)
