July 9 (Bloomberg) -- Crude oil rose for the first time this week after Iran test-fired a long-range missile capable of reaching Israel and the dollar fell.

The missile fired by Iran's Revolutionary Guards Corps as part of war games was ``a Shahab 3 with a conventional warhead weighing 1 ton and a 2,000-kilometer (1,240-mile) range,'' state television Al-Alam said. Israeli military was reported to have conducted exercises last month for a strike on Iran, OPEC's second-biggest oil producer.

``It's an escalation of tensions and it's going to stay for a while until clear signals are sent or until someone starts firing at each other,'' said Anthony Nunan, Tokyo-based assistant general manager for risk management at Mitsubishi Corp. ``Iran is flexing its muscles and Israel's exercise stepped up the fear and also sent a message to the U.S. and Europe that something has to be done about Iran.

Crude oil for August delivery rose as much as 69 cents, or 0.5 percent, to $136.73 a barrel in electronic trading on the New York Mercantile Exchange. It traded at $136.70 at 1:34 p.m. Singapore time.

Iran has said it may blockade the Strait of Hormuz, the shipping lane for a fifth of the world's crude, if its nuclear facilities are attacked. The country has the second-biggest proved oil reserves and is the second-biggest producer in the Organization of Petroleum Exporting Countries.

The dollar traded at $1.5717 against the euro at 1:35 p.m. in Singapore from $1.5670 in New York yesterday. It reached $1.5611 on July 7, the highest level since June 25.

Brent crude oil for August settlement climbed as much as 72 cents, or 0.5 percent, to $137.15 a barrel on London's ICE Futures Europe exchange. Yesterday, it declined $5.44, or 3.8 percent, to settle at $136.43 a barrel, the biggest drop since March 19. Prices climbed to a record $146.69 on July 3.

To contact the reporter on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net

Last Updated: July 9, 2008 01:37 EDT