* Dollar off record low vs euro on oil price slide
* US financial sector woes seen hurting dollar longer term
* Speculators looking to sell dollar/yen below Y105
* Japan margin traders boost dollar long positions
By Shinichi Saoshiro
TOKYO, July 16 (Reuters) - The dollar rose against the euro
on Wednesday after sliding to a record low the previous day, with
a sharp drop in oil prices helping to temporarily offset mounting
gloom over the U.S. financial sector.
Investors battered the dollar to a record low against the
euro the previous day as fears reached fever pitch 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 that restoring stability to the
hard-hit financial sector was his top priority, suggesting that
any potential interest rate hikes to contain inflation won't be
coming soon.
But the dollar came off its lows against the euro and the yen
as crude oil's biggest price plunge since the 1991 Gulf War
briefly shifted investors' attention away from troubles in the
U.S. financial sector and economy.
Oil was little changed in Asian trade at just below $139 a
barrel <CLc1>.
"Bernanke placed top priority on returning the U.S. financial
sector back to normal, which further pushed back rate hike
expectations," said Hideaki Inoue, chief manager of forex trading
at Mitsubishi UFJ Trust Bank.
"But the dollar was not sold as much as otherwise possible
thanks to the lower oil prices," Inoue said.
The euro fell 0.2 percent from late U.S. trade to $1.5886
<EUR=>, having pulled back from a record high of $1.6040 hit on
trading platform EBS the previous day.
The dollar eased 0.1 percent to 104.51 yen <JPY=>, up from a
six-week low of 104.16 yen struck on Tuesday as it plummeted 1.5
percent -- the biggest one-day tumble since the collapse of Bear
Stearns on March 17.
Traders said the dollar's slide below the 105 yen threshold
was a key psychological break that could prompt speculators to
try to push it even lower.
But currency day-traders in Japan saw the dollar's drop below
105 yen as a buying opportunity.
Data from the Tokyo Financial Exchange showed traders boosted
their dollar-long positives by the second biggest one-day amount
in records going back to mid-2006.
Traders who make leveraged bets with margin accounts are
known for buying higher-yielding currencies on any sharp
pull-back, then selling when such currencies rebound against the
low-yielding yen.
OIL AND THE DOLLAR
Analysts expect the dollar's rebound from falling oil prices
to be fleeting.
"The dollar received a reprieve because the fall in oil was
so visible," said Masafumi Yamamoto, head of foreign exchange
strategy for Japan at Royal Bank of Scotland.
"But from a longer-term perspective, the dollar has been
shown to be less correlated to oil prices compared with the euro.
Therefore the dollar does not need to be seen in very close
conjunction with oil market trends."
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
speak at the House of Representatives later in the day.
[]
Later, U.S. Treasury Secretary Henry Paulson told the
committee that distressed mortgage lenders Fannie Mae and Freddie
Mac had the potential to pose systemic risks to the financial
system. []
The Australian dollar slipped after Reserve Bank of Australia
Governor Glenn Stevens said interest rates could fall before
inflation came back within the central bank's target band, just
as it was often necessary to raise them before inflation climbed
above the band. []
The Aussie was down 0.3 percent at $0.9760 <AUD=D4> on the
Reuters dealing system, pulling back from an earlier high of
$0.9815 that took the high-yielding currency back near a 25-year
peak of $0.9851 struck on Tuesday.
(Additional reporting by Eric Burroughs; Editing by Michael
Watson)
