NEW YORK (Reuters) - The dollar fell broadly on Friday as fears of further write-downs at US financial institutions raised speculation the Federal Reserve would not signal a shift toward tighter policy when it meets next week.

Rebounding oil prices, more inflation-busting talk from a European Central Bank (ECB) official and an unexpected surge in German producer prices in May to an almost two-year high added to selling pressure on the greenback.

These developments were seen as confirmation that the ECB 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 versus the dollar.

"We are starting to see a slip in confidence in the overall outlook of the US economy yet again," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.

"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. 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."

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

The Fed meets on June 24 to June 25 and is widely expected to leave the fed funds rate target at two 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. US 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 and MBIA Inc. On Friday, Merrill Lynch cut the 2008 earnings estimates of US large-cap regional banks, citing higher loan losses and reserve building.

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, the lowest level since June 10, according to Reuters data.

It was poised for its largest weekly loss since March 30. The euro jumped to an intraday peak of $1.5651. It was last up 0.8 percent at $1.5630.

ECB Executive Board member Lorenzo Bini Smaghi, writing in a column for the Financial Times published on Friday, said the central bank will have to raise interest rates unless the euro zone services sector improves productivity to counter higher commodity prices.

At the same time, German producer price inflation rose at a faster-than-expected pace in May to its highest level since July 2006, fanned by surging energy costs.

"That's pushing the euro up. With the ECB forever concerned about inflation and the inflation data out of Europe coming in stronger than expectations, that's going to keep the focus on rate hike expectations in the euro zone," said Ron Simpson, director of FX research at Action Economics in Tampa, Florida.

"ECB council members have been very clear that we are not expecting a series of rates hikes, but on the other hand it's to be dependent on incoming data. If we keep seeing numbers like this, at some point the market will begin to price in more than one rate hike by the bank."

Oil rose above $133 a barrel, rebounding from Thursday's sharp sell-off after China's move to raise fuel prices. Analysts said the thinking in the market was that China's fuel price increase may actually boost demand.

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.

Worries about the health of the US financial sector knocked stocks and sent the dollar tumbling against the Japanese yen and Swiss franc. The dollar fell as low as 107.24 yen. It was last down 0.6 percent at 107.40 yen.

Against the Swiss franc, the dollar dropped 1.1 percent to 1.0340 francs, surrendering gains made Thursday after the Swiss National Bank elected to keep its borrowing costs on hold at 2.75 percent.