Amid speculation that surging oil prices will stop the European Central Bank from cutting interest rates, investors warned that the dollar will continue its slide this week.

Wall Street had been counting on the European Central Bank cutting interest rates sometime this year, but this now looks unlikely to happen, according to Thomson Reuters:

Analysts said that investors seeking higher returns were … snapping up currencies such as the euro and the Australian and New Zealand dollars at the expense of the low-yielding greenback.

This week the Fed slashed its growth forecasts for 2008 and highlighted growing concerns over inflation. The build-up in inflation pressures would make it hard for the Fed to cut interest rates again, while the slower growth picture means tighter monetary policy would not be feasible.

The euro traded higher around $1.5780 on Friday. In addition to the spike in oil prices, further weakness in the U.S. stock market next week could erode risk appetite and hurt the dollar against currencies such as the yen and Swiss franc.

“Normally, cheaper money creates boom-like conditions,” says Bill Bonner in The Daily Reckoning. “But normally, it comes at a cost: consumer prices soon begin to rise. As the economy ‘heats up’, the domino of labor costs falls over; workers are in demand so they ask for more money.

“Then, that domino knocks over consumer price stability; prices rise. Then, a whole line of dominos topples over. Bond investors run for cover, for example, forcing up interest rates. Then, the economy ‘cools down’, as the cost of money increases.

“The dollar bubble is going to burst, and that is inevitable,” adds Addison Wiggan. “The effects on the economy of that burst are going to be serious. As long as investors, consumers, and business managers continue to base our financial decisions on assets of inflated and unrealistic value, we are denying this inevitable outcome.

“The more we depend on those inflated values, the more damage we will suffer when the bubble bursts.”