Oil prices hold near US$128 a barrel after rising more than US$5 overnight on weaker dollar

Oil held near US$128 a barrel Friday in Asia after rising more than US$5 overnight as the dollar swooned against the euro in response to comments by the head of the European Central Bank.

The dramatic reversal in what had been a weakening market came after ECB President Jean-Claude Trichet suggested the bank could raise interest rates and the euro climbed against the dollar. When interest rates rise in Europe, or fall in the U.S., the dollar tends to weaken against the euro. Many investors tend to 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, and analysts believe the dollar's protracted decline has been a major reason why oil prices have nearly doubled in the past year.

Meanwhile, the dollar held relatively steady against the yen, changing hands near 106 yen in Tokyo's currency market. The euro was trading at levels near US$1.56 on Trichet's comments.

Trichet 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 U.S., which is weakening the dollar."

Light, sweet crude for July delivery rose US$5.49 overnight _ its biggest single-day price increase in the history of the New York Mercantile Exchange crude contract _ to settle at US$127.79 a barrel. Larger one-day percentage jumps have taken place in the past.

Midafternoon in Singapore, the contract was up 11 cents at US$127.90 a barrel in electronic trading.

Earlier this week, Federal Reserve Chairman Ben Bernanke indicated that more interest rate cuts are unlikely in the U.S., sending the dollar higher and pushing oil prices lower.

Oil's decline from the record US$135.09 hit May 22, though, has come largely on concerns about demand, and the factors that slashed the prices by more than US$10 are still present, analysts noted. They said they were uncertain whether Thursday's trading could be the start of a new surge higher or just an exception.

Recent data show high prices have led consumers to cut their gasoline consumption. Meanwhile, many Asian nations are cutting fuel subsidies, effectively raising prices, which is expected to further dampen demand.

Protests broke out in India and Malaysia on Thursday as consumers reacted angrily to sharp fuel price hikes that could undermine governments in both countries.

In the U.S., which consumes nearly a quarter of the world's oil, gasoline demand was down 1.4 percent last month from the same period a year earlier. Also, U.S. automakers are cutting production of gas-guzzling SUVs and trucks, and airlines are cutting capacity, both due to high fuel prices and the altered habits of consumers.

In other Nymex trading in Asia, heating oil futures rose 1.32 cents to US$3.694 a gallon (3.8 liters) while gasoline prices fell 0.15 cent to US$3.333 a gallon. Natural gas futures rose 5.4 cents to US$12.573 per 1,000 cubic feet.

July Brent crude rose 50 cents to US$128.04 a barrel on the ICE Futures exchange in London.

___

AP Business Writer John Wilen in New York contributed to this article.