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.

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.

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. 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. It was poised for its largest weekly loss since March 30.

The euro jumped to an intra-day peak of 1.5652 against the dollar. 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.

Cable maintained its early rally after the higher-than-expected retail sales data released on Thursday (increased 3.5% M/M and 8.1% Y/Y in May versus the forecast of –0.1% and 4.1% respectively) and rose to 1.9792 against the dollar.

Oil prices CLc1 earlier topped $136 a barrel, rebounding from Thursday's sharp sell-off after 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. Worries about the health of the U.S. financial sector knocked stocks and sent the dollar tumbling against the Japanese yen. The dollar fell as low as 107.12 versus Japanese yen.

The Australian and New Zealand dollars posted weekly increases on speculation the countries will maintain their yield advantages over the U.S and rose to 0.9567 and 0.7648 respectively. The target lending rates of 7.25 percent in Australia and 8.25 percent in New Zealand compare with the 2 percent fed funds target.