FOREX-Dollar falls as oil rallies, credit jitters linger

* Dollar falls as oil rebounds amid Saudi talks

* Credit jitters weigh as Moody's cut two US insurer ratings

* Focus turning to FOMC amid thin data calendar

(Adds comments, update prices, changes byline)

By Bate Felix

LONDON, June 20 (Reuters) - The dollar fell against a basket of major currencies on Friday after a rally in oil and a ratings downgrade of two U.S. insurers that raised fresh concerns about the financial sector and broader U.S. economic health.

Oil CLc1 rose above $133 a barrel after a near $5 plunge on Thursday, on China's move to raise fuel prices.

The dollar has tended to fall when oil prices surge due to speculation that oil-producing countries may use the increased dollar-denominated windfall from crude exports to buy euros and other currencies to diversify their portfolios.

Investors will be alert to the outcome of a meeting on Sunday in Saudi Arabia between consumers and producers to discuss the surge in crude.

"We are getting a range of different headlines coming through from there about oil price," said Stephen Koukoulas, global strategist at TD Securities.

"There is a broad based dollar weakness on a perception perhaps, that oil will stay very high for at least a little while," he said.

Continuing jitters over the now 10-month old credit crunch were highlighted as Moody's Investors Service stripped the insurance arms of Ambac Financial Group (ABK.N) and MBIA Inc (MBI.N) of their Aaa" ratings late on Thursday, citing their impaired ability to raise capital and write new business.

Investment bank Citigroup (C.N) also warned late on Thursday that it could take substantial write-downs in the second quarter.

"At the margin equities markets remain very nervous. There is a lingering concern about the performance of the banking sector, whether there are further problems there and generally anything associated with the credit crunch," Koukoulas said.

By 1045 GMT, the dollar was down 0.6 percent on the day versus a basket of six major currencies .DXY, touching a 10-day low at 73.005.

The euro gained 0.7 percent to $1.5618 EUR= and rose a quarter percent to 167.78 yen EURJPY=, having earlier hit an 11-month high at 168.12 yen.

Against the Swiss franc, the dollar shed 0.9 percent to 1.0350 francs CHF=, letting go of gains made on Thursday after the Swiss National Bank elected to keep its borrowing costs on hold at 2.75 percent.

FED EYED

U.S. data on Thursday did little to improve the dollar's fortunes as output in U.S. Mid-Atlantic factories pulled back for the seventh straight month as costs shot up to a 28-year high.

With little of note in terms of economic data out of the U.S. and Europe on Friday, dealers said major currencies were likely to trade in fairly narrow ranges ahead of next week's Federal Reserve interest rate-setting meeting and accompanying statement.

But analysts say U.S. central bank's statement may be less hawkish than some might expect, particularly after a series of inflation-fighting comments from U.S. policymakers.

"We believe that Fed tightening expectations remain overdone, and under such conditions upside in the greenback is fairly limited," UBS said in a note to clients.

The Canadian dollar was supported after Bank of Canada Governor Mark Carney on Thursday said an unprecedented rise in commodity prices required a "relentless focus on inflation". [ID:nOTW000095]

The BOC unexpectedly held its key interest rate at 3 percent last week and signalled an end to its rate-cutting cycle as inflationary pressures were surprisingly strong.

The U.S. dollar edged down 0.2 percent to C$1.0131 CAD=. (Additional reporting by Michael Taylor)