Oil jumps $4 as dollar slides

NEW YORK (Reuters) - Oil jumped $4 to over $126 a barrel on Thursday, rebounding from a sharp two-day sell-off as the dollar slid after the European Central Bank signaled it could raise interest rates this year.

U.S. crude traded up $4.00 to $126.30 a barrel by 2:06 p.m. EDT after ending at $122.30 on Wednesday, its lowest settlement in almost a month. London Brent gained $3.83 to $125.93 a barrel.

Investors have rushed into oil and other commodities as a hedge against the weak dollar and inflation, helping drive crude to a record $135 a barrel in May.

The greenback fell against the euro on Thursday after European Central Bank President Jean-Claude Trichet signaled it could increase rates later this year.

"He sounded hawkish and talked about raising rates. It sent the dollar down rather quickly," said Chris Jarvis, senior analyst for oil at Caprock Risk Management in New Hampshire.

Oil had been falling from record highs this week after the U.S. Federal Reserve issued a rare warning on the inflationary risk posed by a weak dollar, suggesting it is not likely to cut interest rates further this year.

More weakness came from concerns that Asian demand growth -- which has helped underpin the six-year rally in oil prices -- could falter as some countries ease fuel subsidies due to high prices.

"You have a large layer of global oil demand which is undertaking cuts in subsidies. Right now, that is what's driving the fundamental worries," said Olivier Jakob, analyst at Petromatrix.

This week, India raised retail petrol and diesel fuel prices by about 10 percent and Malaysia hiked petrol prices by 41 percent, after Taiwan, Sri Lanka and Indonesia reviewed their subsidies last month.

Rising fuel prices in Asia and weaker fuel consumption in the United States, the world's top consumer, are expected to lead to further reductions in estimates for global oil demand growth in 2008.

The International Energy Agency, adviser to 27 industrialized countries, issues its latest forecasts next week and has said it may lower its 2008 demand projection further.

The U.S. Energy Information Administration on Wednesday reported gasoline inventories rose 2.9 million barrels last week while gasoline demand over the past four weeks slumped 1.4 percent versus last year.

Distillate stocks jumped by 2.3 million barrels, while crude stocks fell 4.8 million barrels.

(Reporting by Matthew Robinson, Gene Ramos, and Robert Gibbons in New York; Alex Lawler in London; Maryelle Demongeot in Singapore; Editing by Marguerita Choy)

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