Oil snapped a two-day slide on Tuesday, climbing above $69 as the U.S. dollar retreated.

U.S. light crude for July delivery rose $1.20 to $69.29 a barrel by 1430 GMT (10:30 a.m. EDT), after dipping as low as $68.43 in early trade.

London Brent crude gained $1.27 to $69.15.

Oil prices have more than doubled since February, rising with equities and helped by currency movements as a weaker greenback makes dollar-denominated commodities cheaper.

The S&P 500 index has risen by 39 percent since touching a one-year low on March 9, and increased risk appetite has pushed down demand for the dollar and its relative safe haven status.

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 boost fuel demand, have spurred 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 oil 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 RETREATS

The dollar paused from its latest gains while investors questioned whether there was a strong enough chance that a likely U.S. interest rate rise later this year would justify pushing the currency higher.

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