June 3 (Bloomberg) -- Copper fell the most in six weeks, dropping from a seven-month high, as a rising dollar eroded the appeal of commodities as an inflation hedge and on speculation that prices no longer reflect demand after a five-month rally.

The U.S. Dollar Index, a six-currency measure, rose as much as 1.5 percent after yesterday touching the lowest level of the year. Rio Tinto Group, the world’s third-biggest mining company, said copper may reverse recent gains in the next nine months as the global recession creates an “uncertain” outlook.

“With the dollar due for a consolidation period and possibly heading higher, it does make copper vulnerable,” said William O’Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. “Given the levels of slowing economic growth and weak demand, copper could be due for a setback.”

Copper futures for July delivery fell 8.55 cents to $2.212 a pound on the New York Mercantile Exchange’s Comex division. The 3.7 percent decline was the steepest for the most-active contract since April 20. Yesterday, the price jumped to $2.353, the highest since Oct. 15.

The metal also fell after a private report showed companies in the U.S. cut an estimated 532,000 workers from payrolls in May, signaling the labor market is still weak. Economists forecast the ADP Employer Services report would show a decline of 525,000 jobs, based on the median of 28 estimates in a Bloomberg News survey.

‘Economic Malaise’

“In the U.S., Europe, Japan and elsewhere in the world, there’s still an economic malaise,” O’Neill said. “Even if we’re bottoming, we’re still in a very weak period for growth.”

Copper has surged 57 percent this year on speculation the worst of the global recession was over and commodity demand would rebound.

Higher prices have “not necessarily been supported” by demand, Bret Clayton, the chief executive officer of Rio Tinto Copper, said yesterday at a conference in London. The company is still “bullish” on copper’s outlook over three to five years, he said, citing supply constraints and a lack of new discoveries.

Eliane Tanner, an analyst at Credit Suisse Group AG, agreed that demand remains weak. “We are still a bit skeptical about the latest recovery in prices, which was mainly fueled by an improvement in risk appetite,” she said by telephone from Zurich.

On the London Metal Exchange, three-month copper slid $130, or 2.6 percent, to $4,920 a metric ton ($2.23 a pound). The metal touched a record $8,940 a pound on July 2.

Aluminum Gains

Among other LME metals for three-month delivery, aluminum rose 0.8 percent to $1,484 a ton. Gayle Berry, an analyst at Barclays Capital in London, said increased consumer buying of the lightweight metal in recent weeks has supported prices.

“After de-stocking in the first quarter, we are seeing signs of smelters starting to stock up again,” Nenad Pavic, the manager of the materials department at Alcoa (China) Investment Company Ltd., said today. New York-based Alcoa is the largest U.S. aluminum producer.

Nickel slid 2.8 percent to $14,205 a ton. Lead lost 3 percent to $1,610 a ton. Zinc fell 2.9 percent to $1,535 a ton, and tin was unchanged at $14,500 a ton.

To contact the reporters on this story: Millie Munshi in New York at mmunshi@bloomberg.net; Anna Stablum in London at astablum@bloomberg.net

Last Updated: June 3, 2009 14:37 EDT