By Sam Forgione
NEW YORK (Reuters) - Oil prices slipped on Wednesday, giving up gains after an early rebound on a drop in U.S. crude oil inventories, while the dollar fell as investors betting against the euro were forced to reverse those positions following hawkish comments from a European policymaker.
Wall Street ended lower, as the S&P 500 moved in tandem with oil prices through most of the day, and closed at a low not seen since Nov. 13.
The dollar was sharply lower in afternoon trading on a resumption of the severe selling which had characterized last week's plunge against the euro after disappointment over European Central Bank policy moves.
Traders attributed the declines in the dollar to comments from European Central Bank member Ewald Nowotny, who said markets had overestimated what action the ECB would take at its Dec. 3 policy meeting, adding "there were exaggerated expectations in relation to the actions taken by the ECB."
The euro > rose to $1.1029 after hitting a high of $1.1041, a level not seen since early November; it was seen as something of a surprise move ahead of the Dec. 15-16 Federal Reserve meeting on U.S. monetary policy.
"In a market that's looking for information he was really the sole voice," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York.
Coming into this week, speculators had amassed their largest short position in the euro since May, and the change in the market's tenor since the ECB failed to deliver the jolt that investors expected has kept the dollar soft and the euro stronger.
"People thought that the ECB would take a step back and try to talk down the rhetoric, but instead you had Nowotny come out today and say, 'You know what? The ECB is right'," Borthwick said.
Analysts still expect the dollar to rise in the coming weeks. The dollar index <.DXY>, which tracks the greenback versus a basket of six currencies, was last down 1.2 percent.
U.S. crude was initially supported by data showing a surprise 1.9-million-barrel fall in U.S. inventories to 488 million barrels last week. But traders seemed more concerned about a build in distillates, including diesel, causing earlier gains to reverse.
U.S. crude
Major equity averages traded in tandem with oil, with the S&P peaking early in the morning as oil rallied, and then slipping through most of the morning.
The Dow Jones industrial average <.DJI> ended down 0.4 percent to 17,492.30, the S&P 500 <.SPX> fell 0.77 percent to 2,047.62 and the Nasdaq Composite <.IXIC> gave up 1.5 percent to 5,022.87.
"I think the market is starting to be a little bit more concerned about global economic weakness," said Paul Nolte, senior vice president and portfolio manager at Kingsview Asset Management in Chicago.
The prospect of a merger between chemical giants Dow Chemical and DuPont boosted those shares. Dow Chemical
MSCI's all-country world equity index <.MIWD00000PUS>, which tracks shares in 45 nations, was last down 0.34 percent. Europe's broad FTSEurofirst 300 index <.FTEU3> ended down 0.5 percent.
U.S. Treasury debt yields fell. Benchmark 10-year Treasury notes > were last up 2/32 in price to yield 2.21 percent, from a yield of 2.24 percent late Tuesday.
Gold > initially rose 0.2 percent, supported by dollar softness, but ended nearly flat on the day as investors remained cautious ahead of the anticipated Fed rate rise next week.
(Additional reporting by Tanya Agrawal, Gertrude Chavez-Dreyfuss and Dion Rabouin in New York and Clara Denina in London; Editing by James Dalgleish)
