Crude oil prices staged a strong rally earlier last month, testing 85 U.S. dollar per barrel, as dollar registered sharp losses after U.S. Federal Reserve's decision to pump 600 billion dollars into the system.

Last Friday, the prices easily shrugged off a bout of downbeat economic data and reclaimed a two-year high of 89.19 dollars per barrel as dollar suffered a drubbing.

Some analyst believed that the market forces, U.S. dollar weakness, mounting inflationary pressure along with continuous inflow of hot money into the crude oil market could see oil prices test the 90-dollar psychological mark for the first time in 2010 and break 100 dollars early next year.

Good hedge against weaker dollar,inflation Trader noted that mounting concerns of a resurgent Eurozone debt crisis is likely to stunt European economic growth prospects this year, prompting nervous investors to diversify away from euro and rush into perceived safe havens such as dollar and gold.

A stronger dollar typically keeps a lid on oil prices as it boosts the value of greenbacks paid to producers while making it more expensive for consumers holding other currencies.

"If the dollar continues to rise, it can start to be a little bit of drag on oil market," said Matt Zeman, chief market strategist at LaSalle Futures Group.

But analysts agreed that more encouraging signs of global economic recovery will lift market sentiment and Europe's progress on containing the spreading debt crisis will also help investors turn attention away from it.

If growth assumptions and risk appetite make a comeback, dollar will reverse gains right away and slip broadly as U.S. Federal Reserve has expected.

"QE2 is a double-edged sword, on the one hand, it is designed to increase economic activity, which is certainly positive for oil, on the other end of the spectrum, we saw the dollar weaken quite a bit on QE2, I believe without other external factors like Korea and Eurozone, we will probably be looking at the weaker dollar at this point based on printing more money, so QE2 is considered quite positive for oil price through increasing economic activity, or through weakening of the U.S. currency," Zeman said.

"The recent strength in dollar is reflection of lack of confidence in European economy, and the strength is just temporary," said Peter Donovan, vice president of Vantage Trading in New York.

Donovan pointed out that the crude oil has become a financial instrument saying "The crude oil is a very good hedge against equity market, dollar and uncertainties in the global economy."

Oil, next target of specultor?

Hedge funds has ramped up bullish bets, pouring cash into commodity markets since this summer, while betting that the further weakening dollar will buoy up commodities prices, without regard to the fundamentals that underlay the market.

The CBOT corn prices have surged nearly 50 percent since June, and the ICE cotton futures have rocketed 73 percent since June. The NYMEX gold prices has surged more than 200 dollars and topped 1,410 dollars per ounce during the same period of time. Some traders believed that crude oil will fall prey to speculation quite soon.

"Hedge funds bullish positions in oil hit a 4-year high as they have no other choice but to react to the bullish actions of the Fed. No one should blame speculators for driving up prices because the Fed gave the hedge funds no choice," said Phil Flynn, Vice President, Energy Analyst and General Market Analyst with PFGBEST.

Zeman said "Speculators played a big role in the crude oil market, they are going to pile money into the crude oil market, especially when you see a lot of analyst from large investment banks appear on TV, taking about how they feel the oil price going higher."p "Lots of people are making bets right now on 100 dollars or higher oil, I think more you seen on the media, the more speculators you have jumping on the bandwagon, and it has become a self-fulfilling prophecy," Zeman said.

"Some speculators are in, but if the prices break up 90 dollars, we will see even more of them buying at the highs and jumping on the bandwagon," Zeman added.