NEW YORK (Reuters) - Oil prices rose to over $127 a barrel on Friday as a drop in the dollar drew in investors seeking to hedge against the weaker greenback.

U.S. crude settled up 73 cents at $127.35 a barrel after trading as high as $128.30. London Brent gained 89 cents to settle at $127.78 a barrel.

Oil hit an all-time high of $135.09 a barrel last week, driven by rising flows of cash from investors and concerns supplies will struggle to match demand longer term, before demand concerns sent prices lower.

“Our view is that this bull run is not over,” said Mike Wittner of SG. “It’s going to continue to be volatile ... there’s further upside.”

Prices fell in early trade on Friday, hitting a session low of less than $125 a barrel, amid concerns that increased surveillance of oil markets by U.S. regulator the Commodity Futures Trading Commission (CFTC) could shake some speculators out of the market.

Support for oil stemmed from the dollar falling against the euro as some investors sold the U.S. currency after a string of recent gains.

Investors have used oil and other commodities as a hedge against the weaker dollar and inflation as the housing crisis and high fuel prices batter the U.S. economy.

Demand in consuming nations like the United States and Britain has already showed signs of faltering under the weight of rising fuel costs, and some analysts are concerned demand in some Asian countries could be hit if governments cut subsidies.

The subsidies have cost governments millions, prompting Taiwan, Indonesia and Sri Lanka to raise domestic fuel prices and India to consider it.

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Yet South Korea said on Friday it might cut taxes on fuel to ease price pressures as transportation workers threaten to strike, and Thailand said it was selling fuel to bus companies at a discount after a one-day strike.