Oil prices bounce back as US dollar weakens

Federal policy makers have kept interest rates near zero to combat worst recession since 1930s

Posted: Wednesday, September 23, 2009

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 $1.84 to settle at $71.55 a barrel on the New York Mercantile Exchange.

With the October contract expiring Tuesday, traders focused on the November contract, which added $1.83 a barrel to settle at $71.76.

The euro hit $1.4821 Tuesday, its highest level since September 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 policy makers 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.

Demand for gasoline for the week ended Friday jumped 4.2 percent from a year ago when Hurricane Ike disrupted the supply of fuel along the Gulf of Mexico and the Southeast, according to a MasterCard SpendingPulse weekly report.

Still, consumption remains weak with high unemployment and the economy pushing down demand for gasoline to levels that go back to 2004 and 2005, said Michael McNamara, vice president of SpendingPulse.

The report is based on aggregate sales activity in the MasterCard payments network, coupled with estimates for all other payment forms, including cash and check.

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.

Prices at the pump edged lower, falling 0.7 cents overnight to $2.544 a gallon, according to auto club AAA, Wright Express and Oil Price Information Service. Prices are 6.3 cents lower than a month ago and $1.195 below year-ago levels.

Alaska gas prices remain the highest in the nation, at $3.39 a gallon on Monday. Juneau currently has the cheapest gas in the state, at about $3 a gallon as of Monday.

• Associated Press writers George Jahn in Vienna and Alex Kennedy in Jakarata, Indonesia, contributed to this report.



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