Oil prices dropped to $75 a barrel on Monday reacting to a rising dollar and tracking weak European equities as investors became more risk averse.

NYMEX crude for January delivery fell 46 cents to $75.01 a barrel by 1041 GMT (5:41 a.m. EST). The contract fell 99 cents to settle at $75.47 a barrel on Friday.

Brent crude was down 33 cents at $77.19 a barrel, more than $2 above front month NYMEX.

What we're seeing on Monday morning is a bit of dollar strength following on from Friday and a reaction in financial markets by oil, said broker Tony Machacek at Bache Financial.

The dollar hit a five-week high against a currency basket on Monday, extending its rally from Friday when strong U.S. jobs data fueled speculation the Federal Reserve may consider winding down its stimulus measures.

European shares fell off Friday's two-week closing high in a broad market sell-off as investor appetite for risky assets began to fall, with the VDAX-NEW volatility index rising 5 percent, signifying a lower market desire to take on risk.

The dollar has taken a beating for much of the year on the view that interest rates in the United States will stay low as those in other banking zones rise. This would increase the yield advantage of other currencies against the dollar.

Oil was a bit odd on Friday, a little bit schizophrenic and couldn't decide whether the non-farms data was a good thing or a bad thing before it finally decided it was good, said David Morrison, an analyst at privately-held fund GFT in London.

Today it's right back to the familiar old relationship as we see the dollar rising.

Dollar strength makes commodities priced in the unit more expensive for holders of other currencies.

CONTANGO RISING

The spread between first and second month U.S. crude, also known as West Texas Intermediate, or WTI, was nearly $1.90 higher, a market condition known as contango.

The forward contango for WTI is steepening with the 24th month contract last traded at $90.05 versus 89.74 on December 1, while the front month has fallen 4.3 percent from $79.04 this month.

For graphic showing steepening of the forward curve, click:

http://graphics.thomsonreuters.com/129/CMD_NYOIL1209.gif

Looking ahead to the end of the week, a raft of Chinese data including import numbers will offer more guidance with expectations for crude imports to remain high.

As far as this week goes, a resurgent dollar will spell further weakness for crude, doubly so if gold gives up its spectacular gains, analyst Stephen Schork wrote in the Schork Report newsletter.

(Additional reporting by Nick Trevelyan in Singapore, editing by Keiron Henderson)