FOREX-Dollar falls on credit jitters, Fed rate worries

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* Dollar falls on fears of a less hawkish Fed, write-downs

* Dollar index set for largest weekly loss since March 30

* ECB official says rates must rise

By Vivianne Rodrigues

NEW YORK, June 20 (Reuters) - The dollar fell broadly on Friday as fears of further write-downs in the U.S. financial sector raised speculation the Federal Reserve would not signal a shift toward tighter monetary policy when it meets next week.

Rising oil prices, more inflation-busting talk from a European Central Bank official and an unexpected surge in German producer prices in May to a near two-year high added to selling pressures on the greenback.

These developments were seen as confirmation that the European Central Bank would deliver an interest rate hike next month, flagged at the bank's last policy meeting. A hike would further enhance the euro's yield appeal against the dollar.

"The dollar is ending the week on a negative tone," said Matthew Strauss, a currency strategist at RBC Capital Markets in Toronto. "Write-downs on Wall Street may not be over and the U.S. economy is not strong enough to support a series of rate hikes despite the Fed's hawkishness."

Fed Chairman Ben Bernanke's tough inflation talk boosted the dollar in recent weeks, but analysts reckon that signs of more turmoil on the U.S. financial sector could prevent the central bank from following the hawkish words with action.

The Fed meets on June 24-25 and is widely expected to leave the fed funds rate target at 2 percent after slashing it by 3.25 percentage points since September. The statement accompanying the decisions will be closely watched for clues on the future course of monetary policy.

"Expectations are growing on the street that Bernanke is going to step away from the overtly hawkish tone that he put out to the market two weeks ago," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington. "Speculation is he is going to signal that rate hikes will not be forthcoming in as quick a manner as people want to believe they will."

U.S. interest rate futures have reduced the chances of a 25 basis points rate increase in August to about 40 percent from 48 percent. Expectations of a year-end rate hike have also been trimmed.

Late on Thursday, Moody's Investor Service downgraded the insurance arms of Ambac Financial Group (ABK.N) and MBIA Inc (MBI.N). On Friday, Merrill Lynch cut the 2008 earnings estimates of U.S. large-cap regional banks, citing higher loan losses and reserve building.

OIL REBOUNDS

The New York Board of Trade's dollar index, which tracks the dollar's performance against a basket of six currencies, dropped to a session trough at 72.932 .DXY, the lowest level since June 10, according to Reuters data.