June 12 (Bloomberg) -- Platinum futures fell as the dollar rebounded, eroding some commodities as an alternative investment. Palladium rallied.

The dollar gained against a basket of the euro, yen and four other major currencies on heightened speculation the Federal Reserve will increase U.S. borrowing costs this year. In March, the slumping dollar helped send platinum to a record high. Gold, silver and copper also tumbled today.

``Metals are going to be held hostage by the fortunes of the dollar and, to a lesser extent, by the energy and U.S. stock markets,'' Edward Meir, a Stamford, Connecticut-based commodity analyst at MF Global Ltd., said in a report. ``All three of these complexes seem to be going in different directions at varying times, so trading in metals will remain volatile.''

Platinum futures for July delivery dropped $11.20, or 0.6 percent, to $2,025.90 an ounce on the New York Mercantile Exchange. The most-active contract has dropped 12 percent from a record $2,308.80 on March 4.

The dollar jumped as much as 1.1 percent today after a government report showed U.S. retail sales rose in May more than economists forecast.

Platinum still has gained 33 percent this year, partly because of mining disruptions in South Africa, the world's biggest producer of the metal.

Rally to $2,500

``If you see a big expansion in investment demand at a time when the South African mining industry is having difficulties in maintaining output, let alone growing it, you could well have a situation where prices really go away to the races,'' Philip Klapwijk, executive chairman of GFMS Ltd., said today in an interview on Bloomberg Television ``We could see prices at $2,500 under certain conditions, maybe even higher on a spike.''

GFMS is a London-based research company.

Palladium futures for September delivery rose $8.65, or 2 percent, to $441.65 an ounce. The percentage gain was the biggest for a most-active contract since May 21. The price rose 17 percent this year, including 0.6 percent this month.

The metal rallied after Russia's OAO GMK Norilsk Nickel, the world's biggest producer, said its stockpiles of the metal may be ``depleted'' in one to five years as the government reduces its holdings.

Palladium for immediate delivery reached a record $1,125 in January 2001 after Russia delayed exports.

``It's quite a narrow market, and if you get supply constraints like we had a few years ago, that can lead to dramatic price increases,'' Klapwijk said. ``Given supply is concentrated in Russia, where there is always a bit of a question mark about security of supply, for some people that is a good reason to hold it at a right price.''

Platinum and palladium are used in jewelry and pollution- control devices in cars.

Japan Recycling

Increasing platinum supply from Japan's jewelry recycling probably will help lessen a production shortfall of the metal, Johnson Matthey Plc said today.

Production of platinum will lag behind demand by 300,000 ounces this year, Johannesburg-based Impala Platinum Holdings Ltd., the world's second-largest producer behind Anglo Platinum Ltd., said on May 19

Johnson Matthey, based in London, makes about a third of the world's auto catalysts.

To contact the reporter on this story: Halia Pavliva in New York at hpavliva@bloomberg.net

Last Updated: June 12, 2008 15:32 EDT