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Oil pushes up as dollar slips; gas ever closer to $4 per gallon

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Associated Press / June 6, 2008

NEW YORK - Oil prices soared yesterday as the dollar swooned and prices at the pump edged to within a penny of $4 a gallon.

Light, sweet crude for July delivery rose as high as $128.26 before easing to settle up $5.49 at $127.79 on the New York Mercantile Exchange. It was the biggest single-day price increase in the history of the Nymex crude contract, though larger one-day percentage jumps have taken place in the past.

Crude's surge came as the dollar fell in response to comments by European Central Bank president Jean-Claude Trichet suggesting the bank could raise interest rates. He spoke after the bank 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 US, which is weakening the dollar."

When rates rise in Europe, or fall in the United States, 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.

Many analysts believe the dollar's protracted decline has been a major reason why oil prices have nearly doubled from year-ago levels. Oil's rally has pushed gas prices to record levels.

Earlier this week, Federal Reserve chairman Ben Bernanke indicated that more interest rate cuts are unlikely in the United States. Bernanke's comments sent the dollar higher, helping push oil prices lower.

The average national price of a gallon of gas rose 0.6 cent overnight to a record $3.989, according to a survey of stations by AAA and the Oil Price Information Service. Prices have not fallen since May 6, AAA records show, and are likely to continue rising for at least a while before eventually turning lower.

"We may still get to $4 in the next couple of days, but I do think . . . it's just a matter of time before the retail price starts to stall and maybe move lower," said AAA spokesman Geoff Sundstrom.

Gas prices are higher than $4 in many parts of the country, and average more than that in 13 states and the District of Columbia.

Diesel prices are already falling; the average national price of a gallon of diesel slid 0.8 cent overnight to $4.77, according to AAA and OPIS, though prices are above $5 a gallon in some areas. High diesel prices have boosted prices of food and consumer goods transported by truck, ship and rail, putting additional pressure on families already struggling with $4 gas.

Oil's decline since May 22 has come largely on concerns about demand. Recent Energy Department data shows high prices have led consumers to cut their gasoline consumption. Meanwhile, many Asian nations are cutting fuel subsidies, effectively raising prices. Automakers are cutting production of gas-guzzling SUVs and trucks, and airlines are cutting capacity, both due to high fuel prices.

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