The dictionary lookup is fundamental to the way Swype works; it would be unusable without it. Even tapping individual keys on a normal keyboard, your finger positioning is not 100% accurate and sometimes spills over onto adjacent keys. With Swype and similar keyboards, the inflection points (where the direction of your finger motion changes) are almost never exactly on top of the intended key, just nearby. In essence, what Swype and similar keyboards do is to keep track of the inflection points and then use a dictionary lookup to find and rank all the words that could share all those inflection points; the position of a given word in the list is determined by a number of factors, including how close you came to those specific keys, how common the word is, how often you've used that word in the past, etc.
For example, let's say you trace the word "and". Looking at exactly the path your finger took, it might be an 80% probability that the first key was an "a" and 20% that it was an "s"; 40% that the second letter was "n", 30% that it was "b", and 30% that it was "h"; and for the third letter, 70% that it was "d" and 30% that it was "f". Swype looks in the dictionary for all words that match the pattern [as][nbh][df] and ranks them to maximize the total probability, and if the probability of first word on that list is sufficiently greater than the probability of the rest of the words on the list, Swype inserts that word unconditionally; otherwise, it shows you a list of suggestions and lets you pick.
Anyhow, as you can see, the dictionary lookup is crucial in trying to figure out what you actually intended to write, and there's no way it could be eliminated from the process.
