Brent climbs above $106 as steep slump prompts investors to buy
* Dollar index holds firm after climbing to seven-week peak
* China's services industry picks up further in October
* East Libya movement launches government, challenges Tripoli
* Coming Up: U.S. factory orders; 1500 GMT
SINGAPORE, Nov 4 (Reuters) - Brent futures rose above $106 a barrel on Monday as investors locked in fresh positions after the previous session's steep fall, but prices are set to weaken amid expectations the U.S. Federal Reserve will scale back its monetary stimulus.
Upbeat U.S. manufacturing data stirred speculation the Fed may roll back its monetary stimulus in December, instead of March as many currently expect, boosting the dollar and weighing on most commodities. Yet that was countered by a deepening crisis in Libya, helping keep oil prices supported.
Brent crude gained 28 cents to $106.19 a barrel by 0408 GMT, after settling nearly $3 lower on Friday at its lowest since July 4. U.S. oil fell 1 cent to $94.60, after settling $1.77 lower and posting its fourth straight week of losses.
"We are still in a situation where we could see significant swings in the dollar and that will lead to a lot of volatility in oil and other commodities," said Ric Spooner, chief market analyst at CMC Markets. "This week it is going to be a data story, but we are likely to see further downside for oil."
Direction of financial markets including oil will depend on the outcome of a slew of key data such as U.S. employment numbers, and talks by four Fed officials, due later this week.
More data pointing to a strong recovery in the United States, in addition to the manufacturing numbers that came out on Friday, would raise expectations the Fed would cut back its stimulus.
That would reduce supply of dollars in the market, bolstering the currency and making dollar-denominated assets such as oil more expensive for holders of other currencies.
The dollar index was holding firm at 80.691 on Monday having climbed to a seven-week peak on Friday.
Brent faces resistance at $108.70 and support at $102.50 this week, Spooner said. For the U.S. benchmark the upper end is $98.70, with the next support at $92.70 once the contract makes a significant breach below $94.67.
Brent may form a temporary bottom in a support zone of $105.49-$105.78, and rebound towards $106.62, according to Reuters technical analyst Wang Tao.
Developments in OPEC-producer Libya left investors worried about supply, keeping oil supported.
Leaders of an autonomy movement in Libya's oil-rich east unilaterally declared a regional government on Sunday, in a further challenge to the weak central government.
The announcement is a symbolic blow to efforts by the Tripoli government to reopen eastern oil ports and fields blocked since summer by militias and tribes demanding a greater share of power and oil wealth.
The recent spate of protests and strikes at ports and oil fields have knocked down crude production to some 10 percent of Libya's capacity of 1.25 million barrels a day.
While easing of tensions between Iran and the West about Tehran's disputed nuclear programme and a weak global economy mean supply fears have eased some what and oil markets are amply supplied, concerns over disruption from the region continue to remain nevertheless.
"Middle east is not in the agenda right now, but it is always with us," Spooner said. "Any new supply threat, or significant decline in output will support prices."
(Editing by Muralikumar Anantharaman)