Dollar heads higher as stock, oil markets rebound

New York - The dollar climbed on Thursday as the oil market bounced up from 12-year lows, providing relief on the US stock market after a bout of heavy selling.

Oil prices rose both in New York and London, and Wall Street stocks rallied, in part reversing Thursday's rout.

The euro dipped to $1.0865 around 22:00 GMT from $1.0874 at the same time on Wednesday.

The yen, traditionally sought as a haven in times of uncertainty, lost ground as markets calmed. The euro edged up to ¥128.27 while the dollar jumped 2.9%, buying ¥118.06.

Investors are watching how central banks react to the sharp fall in oil prices that is muffling inflation.

As widely expected, the Bank of England (BoE) on Thursday unanimously decided to keep its main interest rate at a record-low 0.50%, where it has been since March 2009, and maintained its level of cash stimulus.

It said that recent "declines in oil prices will depress global inflation in the near term".

The BoE's main task is to keep annual inflation close to a target of 2.0%. But the most recent official data showed that consumer prices rose by only 0.1% in November.

The European Central Bank met on policy next week followed a week later by the Federal Reserve.

Federal Reserve policy maker James Bullard warned Thursday that the huge slide in oil prices may delay a return of inflation to the central bank's 2.0% target.

In announcing its first interest rate hike in more than nine years in December, the Fed had said it was confident that inflation would pick up over the medium term.

However, Bullard said, "Inflation expectations in the US may be falling. If so, this would put downward pressure on inflation."

He said the shift in market-based expectations "is becoming worrisome."