May 30 (Bloomberg) -- Crude oil rose as the dollar declined against the euro, reaffirming the appeal of commodities as an inflation hedge.

Oil gained 33 percent this year as a 6.6 percent drop in the dollar versus the euro made crude and other commodities a better value for buyers in other currencies. Prices declined this week after a government report yesterday showed that U.S. fuel consumption last week fell from a year earlier.

``The dollar has a big impact on crude prices,'' said Rick Mueller, director of oil practice at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``Any shift in the dollar's direction will prompt investors to look at crude as a store of value.''

Crude oil for July delivery rose 73 cents, or 0.6 percent, to settle at $127.35 a barrel at 2:54 p.m. on the New York Mercantile Exchange. Futures reached a record $135.09 on May 22. Prices, which have doubled over the past year, fell 3.7 percent this week, the biggest weekly drop since March.

The dollar was down 0.2 percent to $1.554 against the euro as of 2:58 p.m. in New York, after strengthening to $1.5461 earlier today. The U.S. currency had its second monthly advance against the euro.

Yesterday, oil in New York dropped $4.41, or 3.4 percent, to $126.62 a barrel, the lowest close since May 16. It was the biggest decline since March 31. The fall in prices followed an Energy Department report that showed U.S. fuel demand declined 0.7 percent to 20.5 million barrels a day in the four weeks ended May 23 compared with the same period a year earlier.

`Buying Opportunity'

``The market is trying to reconcile a lot of different factors,'' said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. ``Some people look at any drop in prices as a buying opportunity. There are others that look at prices as a tool to allocate supply and demand, and so both demand and prices should move lower.''

Brent crude oil for July settlement rose 89 cents, or 0.7 percent, to settle at $127.78 a barrel on London's ICE Futures Europe exchange. The contract touched a record $135.14 on May 22.

The U.S. Commodity Futures Trading Commission, the watchdog for commodity transactions, is investigating U.S. crude oil trading to determine whether the surge in prices is the result of manipulation or fraud.

The CFTC has been investigating the transportation, storage and trading of crude oil in the U.S. since December, it announced in a statement posted on its Web site yesterday. The commission's probe includes oil-futures contracts. The CFTC did not name any companies being targeted and said details of the probe were confidential.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

Last Updated: May 30, 2008 15:29 EDT