Dollar retreats from earlier gains as oil turns sour

By Dion Rabouin

NEW YORK (Reuters) - The dollar pared earlier gains on Tuesday, as growing worries over slumping oil prices and a global economic slowdown sent investors back to safe-haven currencies.

The dollar fell against the Swiss franc and surrendered most of its morning gains versus the Japanese yen as U.S. oil prices turned negative and investor appetite for risk evaporated.

U.S. crude oil dropped 3 percent, and U.S. stock markets retreated from early gains as American traders rebuked the global rally that had sent Chinese and European markets higher and oil back above $30 a barrel.

"Oil started to weaken again and that - since we're all focused on oil these days - was a key driver," said Axel Merk, president and portfolio manager at Merk Hard Currency Fund in Palo Alto, California.

Oil's overnight action, which saw U.S. crude as high as $30.21 per barrel, was "unsustainable," Merk said, given the growing supply glut and expected increase in production from Iran, which has said it will raise output by an initial 500,000 barrels per day now that international sanctions have been lifted.

The International Energy Agency said in its monthly report on Tuesday that unseasonably warm weather and rising supply will keep the crude market oversupplied until at least late this year.

"All the information has been negative on oil. The only reason for crude to rally was because it's oversold and because it's due for a bounce," Merk said. "At some point that will prevail, but obviously not today."

The dollar index, which measures the greenback against six major world currencies, was flat as early gains against the yen reduced and the euro and franc moved higher.

The dollar was last up 0.2 percent against the yen to 117.55.

The euro gained 0.2 percent to $1.0913. The dollar fell 0.2 percent against the Swiss franc to 1.0031 francs per dollar.

"Risk appetite has disappeared," said Greg Anderson, global head of FX strategy at BMO Capital Markets in New York. "People are short euro and they're short yen, so in a panic they have to buy them."

The dollar did perform well against sterling as the British pound fell to a seven-year low after Bank of England Governor Mark Carney said he had no "set timetable" for an interest rate increase. The pound reversed earlier gains and fell to a session low of $1.4131 following Carney's remarks.

Sterling was last down 0.45 percent at $1.4177.

(Reporting by Dion Rabouin; Editing by Diane Craft)