FOREX-Dollar stabilises off lows, boosted by drop in oil

* Euro steady at $1.5928 EUR=

* Dollar stabilises off record lows, sentiment still gloomy

* Weaker oil helps dollar

(Changes byline, updates prices, adds quotes)

By Alastair Sharp

LONDON, July 16 (Reuters) - The dollar steadied on Wednesday at about a cent above the previous session's record low against the euro, cheered by a sharp retreat in oil prices but haunted by concerns about a fragile financial sector.

Oil was steady after falling sharply on Tuesday, partly due to worries that a faltering U.S. economy would hit demand growth.

"It will be equities and the oil price that will set the tone for the dollar," said Niels Christensen, an FX strategist at Nordea in Copenhagen, adding that dismal corporate news could offset fears of rising inflation.

The euro was flat at $1.5928 by 0955 GMT EUR=, having pulled back from a record high of $1.6038 hit the previous day according to Reuters data.

In a sign of risk aversion and poor dollar sentiment, the greenback hit a 1-1/2 month low versus the low-yielding Japanese yen, at 103.93 yen JPY=.

The euro fell to a one-month low of 165.62 yen EURJPY=.

Concerns about the U.S. financial sector intensified earlier in the week after the U.S. government was forced to come up with a rescue plan for mortgage lending giants Fannie Mae FNM.N and Freddie Mac FRE.N, just as one of the country's biggest mortgage banks collapsed.

In addition, Federal Reserve Chairman Ben Bernanke did the dollar no favours when he said on Tuesday that restoring stability to the hard-hit financial sector was his top priority, suggesting any potential interest rate increases to contain inflation will not come soon.

But while those concerns -- which had sent the dollar to a record low versus the euro -- remained, investors took some heart after the U.S. Securities and Exchange Commission (SEC) issued an emergency rule on Tuesday to limit certain types of short selling in major financial firms.

"If it (the SEC rule) actually proved successful in stabilising the financials, it will also help stabilise the dollar. The dollar/oil link is ... probably another factor supporting the dollar," Paul Mackel, strategist at HSBC. "But the dollar is still on a knife edge and the sentiment is still very, very poor."

STAGFLATION WORRIES

However in the longer run, Nordea's Christensen said the euro zone's slowing growth would put a lid on euro/dollar. "Euro/dollar is very close to the top. We don't expect it to stay above $1.60 for an extended period," he said.

Euro zone consumer price figures released on Wednesday confirmed inflation hit a record 4.0 percent year-on-year in June and had little effect on the currency pair.

Comparable U.S. data is due at 1230 GMT, with consumer prices seen rising 0.7 percent on the month in June after a 0.6 percent increase in May.

On Tuesday, Bernanke told the Senate Banking Committee that financial markets and institutions remained under "considerable stress" and restoring stability was a top priority. Bernanke will probably repeat those themes when he speaks at the House of Representatives later on Wednesday.

While the European Central Bank raised interest rates to 4.25 percent this month, slowing economic growth is keeping the Fed's hands tied. Industrial production and housing market data on Wednesday could provide further proof of a limping U.S. economy.

"Today's U.S. data are unlikely to shift the stagflationary theme, with June headline CPI rising and production/housing data easing," said Commerzbank Corporates & Markets in a client note.

Minutes from the Fed's June meeting are also due on Wednesday.