...all words that are seperated by space...

Ah... something you didn't mention in your OP.

In this case, you could do:

while (my $line = <INFILE>) {
    $line =~ s/(\S+)/$dict{$1} || $1/eg;
    print $line;
}
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In case zero is a valid index, too, you'd need

    $line =~ s/(\S+)/defined $dict{$1} ? $dict{$1} : $1/eg;
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Or, if you're using Perl 5.10, you could write instead

    $line =~ s|(\S+)|$dict{$1} // $1|eg;
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