Oil rises as dollar falls on Europe rate comments

NEW YORK – Oil prices rose back to $125 a barrel Thursday after the dollar fell in response to comments by European Central Bank President Jean-Claude Trichet suggesting the bank could raise interest rates. At the pump, meanwhile, gas prices rose to a new record near $3.99, and are likely to hit $4 soon.

Trichet spoke after the ECB left a key interest rate unchanged amid concerns about inflation. While Trichet said a change in rates was not a certainty, he said some of the bank’s governors favor an increase.

“Oil, which was very weak, rallied on those comments,” said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. “They’re out of step with the U.S., which is weakening the dollar.”

Earlier this week, Federal Reserve Chairman Ben Bernanke indicated that more interest rate cuts are unlikely in the U.S. Bernanke’s comments sent the dollar higher, helping push oil prices lower.

When rates rise in Europe, or fall in the U.S., the dollar tends to weaken against the euro. Many investors buy commodities such as oil as a hedge against inflation when the dollar is falling. Also, a weaker greenback makes oil less expensive to investors dealing in other currencies.

AP