Oil rebounds on weak dollar

NEW YORK -- Oil prices bounced back above $71 on Tuesday as the dollar fell to its lowest level against the euro in more than a year.

Benchmark crude for October delivery rose $1.58 to $71.29 a barrel on the New York Mercantile Exchange. The contract fell $2.33 to settle at $69.71 on Monday.

With the October contract expiring Tuesday, traders focused on the November contract, which added $1.65 a barrel at $71.58.

The euro hit $1.4821 Tuesday, its highest level since August 2008.

Crude is priced in dollars so it becomes cheaper when the dollar falls. Some investors also use commodities such as oil and gold as a hedge against inflation and dollar weakness. The weaker dollar also pushed prices higher for gasoline, heating oil, gold and other commodities.

"If the dollar continues to get pummeled like this it will be a threat to the economic recovery," PFGBest analyst Phil Flynn said, warning of higher energy and food costs.

To combat the worst recession since the 1930s, Federal Reserve policymakers have kept interest rates at a record low -- near zero -- and started an assortment of programs designed to encourage borrowing. Critics have complained that the Fed appears to be printing money to pay for the government's spending binge, and that hurts the dollar.

The Fed is expected to keep interest rates low at its meeting this week. And to avoid unleashing inflation later, policymakers are likely to consider ways to rein in programs designed to keep mortgage rates down and get banks to lend more freely.

"I don't think the Fed can be complacent as the dollar continues to get hit," Flynn said.

Investors are also awaiting the release of the government's weekly petroleum inventory report on Wednesday.

Most analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., think crude oil stocks declined in the week ended Friday, while supplies of gasoline and distillates used to make heating oil and diesel fuel rose.

In other Nymex trading, gasoline rose 2.91 cents to $1.7805 a gallon and heating oil climbed by 4.45 cents to $1.7962. Natural gas was up 2.6 cents to $3.550 per 1,000 cubic feet.

In London, Brent crude rose $1.65 to $71.58 on the ICE Futures exchange.