SAN FRANCISCO (MarketWatch) -- Crude-oil futures rose Tuesday to close above $109 a barrel as the dollar fell after the Federal Reserve cut its key interest rate by three-quarters of a percentage point, pushing up dollar-denominated oil prices.
Crude oil for April delivery closed up $3.74, or 3.5%, to $109.42 a barrel on the New York Mercantile Exchange.
The FOMC cut the fed fund rate, the rate at which banks lend to each other overnight, by 0.75% to 2.25%. The rate cut drove down the value of the greenback against other currencies. The dollar index, which measures the U.S. unit against a basket of major currencies, was last down 0.2% at 71.31.
"The weak dollar has been a critical factor drawing in huge amounts of speculative investment into the energy complex, as a hedge against inflation and that can only continue if the Federal Reserve drops rates," said Michael Fitzpatrick, an analyst at MF Global, a futures brokerage.
Crude prices, denominated in dollars, tend to rise when the greenback falls, as a weaker U.S. currency makes crude less expensive to buyers holding other currencies. It also eats into oil producers' dollar-denominated revenues and forces them to raise prices.
Some analysts are expecting the Fed will further cut rates in the future, pushing the greenback lower and oil prices higher.
"Interest rates need to continue to come down," said Darin Newsom, senior analyst at DTN, a commodities information provider. "The U.S. dollar will react accordingly, and that could help to support some commodities."
If that happens, oil prices could touch $115 a barrel, Newsom said.
On Monday, crude ended down $4.53 a barrel, its biggest daily loss in more than 17 years, on fresh concerns about the credit crisis and as traders unwound their bets that have pushed oil prices to a new high of $111.80 a barrel.
"Energy was one of the commodities that fell sharply yesterday as investors sought to eliminate risk due to heightened anxiety in the financial sector and escalating concerns that the economy was sliding into a recession," said MF Global's Fitzpatrick in a note.
Tuesday's better-than-expected earnings reports from Lehman Brothers Holdings Inc. (
LEH: Lehman Brothers Holdings Inc however, temporarily soothed anxieties about the financial crunch. Stocks on Wall Street moved higher.
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"Equities have moved higher overnight and so have oil prices as the panic mentality seems to be receding a bit," said Fitzpatrick.
Also on the Nymex, April reformulated gasoline gained 15.58 cents to $2.66 a gallon, and April heating oil rose 6.95 cents to $3.1379 a gallon. April natural gas surged 31.4 cents to $9.414 per million British thermal units.
The Energy Information Administration will report last week's U.S. crude inventories Wednesday. Analysts surveyed by Platts, an energy information provider, expect crude stocks to show a 2.3 million barrel build.