* Report in the UK's Independent adds to pressure vs dollar
* Trader cites dollar selling by Japan exporters, hedge funds
* Markets pricing in real chance of hike by RBA
* Kiwi latches on, hits 14-mth high
By Masayuki Kitano
TOKYO, Oct 6 (Reuters) - The dollar fell on Tuesday due to a newspaper report saying Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies in the trading of oil.
The UK's Independent newspaper, citing unnamed sources, said the talks centred on using a basket of currencies, including the yen, yuan and euro, as well as gold. The proposed transition would take place within nine years, it said. "This is U.S. dollar negative news which is moving markets and shows that central banks not just in Asia are looking to diversify away from the dollar," said Jonathan Cavenagh, currency analyst at Westpac.
"This looks to be a very long term thing with a few hurdles to cross," he said, adding that European authorities would likely be reluctant to agree to such an idea since euro zone manufacturers are sensitive to exchange rate moves.
The euro rose 0.3 percent compared to late U.S. trading on Monday to $1.4688.
The dollar extended its losses against the yen after the Independent report, falling to as low as 88.97 yen on trading platform EBS, down from the day's high of 89.65 yen.
The greenback was last down 0.5 percent on the day at 89.09 yen.
A trader for a major Japanese brokerage said the U.S. currency had already been under pressure due to dollar selling flows from a variety of players including Japanese exporters, large macro hedge funds and model-based funds.
"I don't get the sense that people are selling just because of this," the trader said, referring to the newspaper report.
Market players probably decided to sell the dollar against the yen, after they saw the dollar's failure to rise above 90.00 yen the previous day, the trader said.
The dollar also came under pressure against the Australian and New Zealand dollars ahead of an interest rate decision in Australia.
EYES ON RBA
The Australian dollar rose 0.1 percent to $0.8781, having jumped about 1.5 percent from the previous day's low on mounting speculation the Reserve Bank of Australia (RBA) may raise rates by 25 basis points, from a record low of 3 percent.
That would make it one of the first central banks in the developed world to lift rates from emergency levels.
The outcome of the policy meeting will be announced at 0330 GMT and, should it hike rates, the Australian dollar will have even more of an yield advantage over other major currencies.
The surge in the Aussie also pushed up the high-yielding kiwi and the renewed dollar-selling on Tuesday helped lift the New Zealand dollar to a 14-month high of $0.7340 earlier.
Australian money and swap rates show investors pricing in a roughly 50 percent chance of a rate hike on Tuesday.
Only last week, markets had priced in a one-in-five chance of a rate rise, but two influential local columnists tipped on Monday a rise in rates. Their unanimity took investors by surprise, and knocked local bill futures lower.
Still, there was a risk of a Aussie dollar sell-off in case the RBA opted to keep rates unchanged, although support is seen around $0.8675 and $0.8570.
"An unchanged decision is posing a bigger downside risk to Aussie than a hike of 25 basis points, which will likely see only limited buying," said Matthew Strauss, senior currency strategist at RBC Capital.
The Australian dollar seems likely to slip if the RBA keeps interest rates unchanged, said a trader for a major Japanese bank. Such an outcome may lead to some broad short-covering in the dollar and cause the euro to dip, he said.
In addition, the Australian dollar could fall against the yen since Japanese retail investors are likely to have long positions in the high-yielding currency, the trader said.
Japanese retail margin traders on the Tokyo Financial Exchange increased their net long position in the Australian dollar against the yen to 94,508 contracts last Friday, a sharp increase from 68,411 lots the day before. (Additional reporting by Anirban Nag in Sydney; Editing by Joseph Radford)