* Aussie hits 14-mth high, RBA raises rates to 3.25 pct
* The Independent says proposal to replace US$ for oil trade
* Trader cites dollar selling by Japan exporters, hedge funds
By Masayuki Kitano
TOKYO, Oct 6 (Reuters) - The dollar fell on Tuesday after a British newspaper said Gulf Arab states were in secret talks to end the use of dollars in oil trading, while the Australian dollar jumped after its central bank raised interest rates.
The additional pressure on the greenback comes on top of recent weakness from market expectations that the U.S. Federal Reserve will not rush to raise interest rates and from the growing view that it has become a funding currency for carry trades.
The dollar fell broadly, with the Australian dollar rallying to a 14-month high of $0.8876 after the Reserve Bank of Australia raised interest rates by 25 basis points to 3.25 percent, becoming the first of the Group of 20 central banks to raise rates as the global financial crisis eases.
The New Zealand dollar also hit a 14-month high, rising to $0.7357.
"In the United States, there is an ample supply of money, while Australia has started to tighten policy and the economy is doing well," said Yuichi Hojo, director of FX distribution for UBS in Tokyo.
"There might be a pullback in the next day or two, but viewed from the longer-term, it seems to be in an uptrend," Hojo said, referring to the Australian dollar.
Britain's The Independent newspaper said that 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. It said the proposal was for trade in crude oil to move over nine years to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, the United Arab Emirates, Kuwait and Qatar.
DOLLAR RETREATS
"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.
Masashi Hashimoto, senior analyst at Bank of Tokyo-Mitsubishi UFJ, said any such moves among Gulf Arab states was unlikely to occur suddenly, adding that the idea of replacing the dollar in oil trading also contained risks for oil producers.
"They are probably holding most of what they have accumulated so far in dollars, even if they have conducted some diversification into the euro," Hashimoto said.
"Just like China, I think they may be stuck in a dollar trap. They could end up eroding the value of their assets," he said.
The euro rose 0.5 percent to $1.4722.
The dollar fell 0.7 percent against the yen to 88.91 yen, edging back toward an eight-month low of 88.23 yen hit on trading platform EBS last week.
Earlier, Japanese Finance Minister Hirohisa Fujii said he had no comment on foreign exchange rates, adding that he told the G7 that the world economy must not engage in competitive devaluations.
Asked about the story in The Independent, Fujii said he was not aware of the report.
The dollar dipped against a basket of currencies, and stood at 76.322, inching back in the direction of a 13-month low of 75.827 hit in late September.
A trader for a major Japanese brokerage said the dollar was also dragged lower against the yen due to dollar selling flows from hedge funds and Japanese exporters.
"I don't get the sense that people are selling just because of this," the trader said, referring to the story in The Independent.
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. (Additional reporting by Anirban Nag in Sydney and Charlotte Cooper in Tokyo)