UPDATE 2-Oil edges higher as dollar falls

* Dollar drops to two-month low against euro

* Technicals: U.S. crude could return to $88 [ID:nL3E7CK24N]

* U.S. inventories higher

(Updates throughout, previous SINGAPORE)

By Jesica Donati

LONDON, Jan 21 (Reuters) - Oil rose on Friday after renewed confidence the European debt crisis would be solved knocked the dollar down against the euro and helped to spur buying across a range of commodities.

Brent <LCOc1> gained 60 cents a barrel to $97.18 per barrel by 1027 GMT, while U.S. crude futures <CLc1> were trading 30 cents higher at $89.89 per barrel.

"The oil market is looking back at what the dollar is doing and the dollar is coming under further pressure, and it has broken through significant support levels, which is helping to push it lower," said David Morrison, a strategist at GFT.

A weakened U.S. currency makes dollar-denominated commodities cheaper for holders of other currencies.

The dollar index <.DXY>, which tracks the currency's performance against a basket of major currencies, and is heavily weighted against the euro, was down by around 0.3 percent.

The euro has risen in response to successful bond sales from highly indebted countries, including Portugal and Spain. [ID:nLDE70K0HA]

U.S. crude has so far fallen nearly 2 percent from last week's close.

Brent futures, also around 1.5 percent lower, have maintained an unusual premium to U.S. crude, in part because of rise in inventories in the world's biggest energy consumer. [EIA/S]

Brent's premium against U.S. benchmark crude was more than $7 a barrel on Friday, down from last week's surge above $8, which was the widest since February 2009.

Oil is nearly $50 below the record high of $147.27 hit in July 2008, but a rally that set in late last year, taking oil prices to nearly $100 a barrel has stoked concerns a fragile economic recovery could unravel.

Ministers of the Organization of the Petroleum Exporting Countries have said there is enough oil on the market and there is no need to produce more, although some analysts do not rule out an informal increase in output.

"We acknowledge the perception of a rapid move to a triple-digit price level does negatively impact sentiment and does generate more cautious inventory procurement and management, which could add to the softer tone we now expect in the near term," JP Morgan analysts led by Lawrence Eagles said.

"There is a rising risk of coming into the office one Monday morning to find OPEC has raised output dramatically," the bank said, adding, "we believe the time has come for investors to pare risk and take some profits."