Oil rose on Tuesday, snapping a two-day slide, to climb toward $69 as the U.S. dollar retreated.

U.S. light crude for July delivery rose 79 cents to $68.88 a barrel by 1100 GMT (7 a.m. EDT), down from a session high of $69.37.

London Brent crude gained 87 cents to $68.75.

Oil prices have more than doubled since February, in line with equities and currency markets, as a weaker dollar makes dollar-denominated commodities cheaper.

The S&P 500 index has risen by 39 percent from a one-year low on March 9 and increased appetite for risk has diminished demand for the dollar as a relatively safe haven.

The currency market has been driving the oil market since the middle of May. Traders are looking more at the dollar than at equity markets now, said Tetsu Emori, fund manager at Tokyo-based Astmax Co Ltd.

Rising expectations of global economic recovery, which could spur fuel demand, have boosted buying across a range of markets, and oil price forecasters have become more bullish, predicting swollen fuel inventories will drop in the coming months.

Societe Generale on Tuesday raised its year-end crude oil price forecasts for 2009 by $8.50 to $65 a barrel in the third quarter and lifted its fourth-quarter forecast by $11.50 to $72.50, citing higher expected U.S. five-year inflation in a research note.

Historically the relationship between oil and inflation expectations is much stronger than oil and the dollar, said Mike Wittner, global head of commodities research at Societe Generale.

Oil prices are being driven lately more by non-fundamentals than fundamentals, and this (five-year inflationary) non-fundamental factor looks like it's going to be with us for a while.

DOLLAR STEADY

The dollar edged lower against a basket of currencies on Tuesday, staying below a two-week high scaled after U.S. jobs data last week stoked expectations for a Federal Reserve rate rise later this year.

Traders said economic indicators and upcoming auctions for U.S. debt could underscore this shift in market sentiment.

All eyes have been on stock markets and currency markets lately, said Tony Machacek, a broker at Bache Commodities.

The auctions today could have a significant shift in the trend of the dollar, and I wouldn't be surprised by a spill-over into oil values.

Nobuo Tanaka, executive director of the International Energy Agency, told Reuters on Monday the agency expects oil stocks in developed OECD economies to fall to 57 days by year-end from 63 days now if OPEC keeps output at current levels and demand recovers.

Later on Tuesday, the market could take direction from weekly U.S. inventory data from industry group the American Petroleum Institute, which is scheduled for release at 2030 GMT (4:30 p.m. EDT).

It will be followed by U.S. Energy Information Administration data on Wednesday.

Analysts polled by Reuters said they expected crude stocks to have fallen by 400,000 barrels last week, while distillate and gasoline stocks could have risen by 1.2 and 1.3 million barrels respectively.

Last week, U.S. crude oil stocks rose by a more-than-expected 2.9 million barrels.

(Additional reporting by Maryelle Demongeot in Singapore, editing by Barbara Lewis and James Jukwey)

Inflation