* Dollar hits five-month high against basket of currencies
* Commodities weighed down by stronger greenback
* Russia-Georgia conflict hits emerging, not major markets
(Updates to U.S. markets close)
By Burton Frierson
NEW YORK, Aug 8 (Reuters) - The dollar raced to five-month
highs against a broad range of currencies on Friday, benefiting
from fears economic weakness was spreading to other countries,
while oil slumped to $115 a barrel as supply concerns waned.
Escalating violence in Georgia helped send emerging economy
stock markets to their lowest in almost a year. Russia was the
hardest hit as investors suddenly viewed all emerging markets
as riskier. For more see [].
Stock markets were transfixed by falling oil, though, which
inspired Wall Street to shake off a weak start and pushed major
stock indexes up more than 2 percent. European stocks also
benefited from the improved sentiment.
The rebound in risk appetite hurt safe-haven assets such as
government bonds, as is normally the case. This sent prices
lower on U.S. Treasuries and weighed on euro zone government
paper, making yields, which move inversely to prices, rise.
"The general market is being moved along by the surprising
strength of the dollar, which is exacerbating the slide in oil
prices -- so all positive for stocks," said Bruce Zaro, chief
technical strategist with Delta Global Advisors in Boston.
"I do feel that July 15 represented the bottom for stocks
and we are going to move higher."
The Dow Jones industrial average <> ended up 302.89
points, or 2.65 percent, at 11,734.32. The Standard & Poor's
500 Index <.SPX> closed up 30.25, or 2.39 percent, at 1,296.32.
The Nasdaq <> finished up 58.37, or 2.48 percent, at
2,414.10.
Wall Street largely shrugged off news that Fannie Mae
<FNM.N>, the largest U.S. home funding source, posted a fourth
straight quarterly loss as home loan defaults increased.
The company said it would slash its dividend more than 85
percent and take other steps to shore up its capital position.
For details see [].
Traders were betting the further drop in oil would help
inflation to ease, stimulating spending by businesses and
cash-strapped consumers and so restoring corporate profit
growth.
U.S. oil prices <CLc1> fell $4.92, or 4.1 percent, to
$115.10 per barrel. Ironically, the market for crude was
responding to worries about weaker demand.
The stronger U.S. dollar also helped, however, outweighing
concerns that an intensifying conflict between Russia and
Georgia could disrupt Caspian energy supplies. [].
"It seems that we've got a lot of selling based on the
stronger dollar," said Peter Beutel, president of trading
consultants Cameron Hanover in New Canaan, Connecticut.
"Energy demand destruction and the dollar return have
formed a quiet alliance to bring the oil market down, and today
the louder of the two is the dollar."
WEAKNESS IN EUROPE
The dollar was up against a basket of major trading-partner
currencies, with the U.S. dollar index <.DXY> up 1.73 percent
at 75.842 from a previous session close of 74.551.
The euro <EUR=> was down 2.02 percent at $1.5012. Against
the yen, the dollar <JPY=> was up 0.71 percent at 110.21.
Data showing Italy's economy shrank in the second quarter
cast a shadow over the euro zone a day after European Central
Bank President Jean-Claude Trichet highlighted risks to growth,
even though he reiterated his concerns about inflation.
Markets interpreted Trichet's comments as dovish, sparking
a steep fall in bond yields as markets priced out the risk of
another euro zone interest rate hike this year.
"There's going to be more speculation of ECB rate cuts
later this year," said Gerhard Schwarz, head of global equity
strategy at UniCredit in Munich.
Japan's corporate bankruptcies rose to their highest in
five years in July while sentiment among service sector workers
fell to a nearly seven-year low, adding to a growing view that
the world's second-largest economy is now in recession.
[].
The gloomy data came a day after the Japanese government
cut its view on growth and suggested the economy may have
entered a recession as high raw material costs and a global
slowdown continued to bite.
The recovery in the dollar, which hit a record low against
the euro just last month, also hurt other commodities, which
are priced in the U.S. currency.
Gold prices <XAU=> fell $17.75, or 2.03 percent, to
$854.70. The Reuters/Jefferies CRB Index <.CRB> was down 12.12
points, or 3.03 percent, at 387.42.
European shares ended a volatile session with gains. The
FTSEurofirst 300 index <> of top European shares closed
0.8 percent higher at 1,199.02 points.
In Tokyo, Japan's Nikkei average <> rose 0.3 percent,
reversing earlier losses. On the day, the Nikkei gained 43.42
points to end at 13,168.41.
(Additional reporting by John Parry in New York and Ian Chua
in London; Editing by James Dalgleish)
