Oil hits 7-week low

By Kevin Plumberg

HONG KONG (Reuters) - Oil prices fell to a seven-week low below $125 a barrel on Thursday as U.S. energy demand was seen reaching a tipping point, sending investors back into Asian stocks for the fourth consecutive day.

A retreat in oil prices and signs of improved confidence in the U.S. financial sector also pushed the U.S. dollar to a one-month high against the yen.

Adding to a sense of short-term relief, U.S. President George W. Bush dropped a threat to veto a housing-bailout bill that would extend a potential $25 billion lifeline to the embattled mortgage lenders Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

The drop in oil and the potential housing rescue together have stopped cold a popular trade in which dealers would simultaneously bet against the financial sector and put their money in the energy sector. The unwinding of this trade has accelerated the upward momentum in equities.

However, uncertainty loomed as to whether economics were supporting the global stock market rally, particularly after data showed Japanese exports fell for the first time in five years.

"The fundamental issue is oil, and this is helping the market become cautiously optimistic," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments in Tokyo. "There's a sense that investors still lack confidence, but the fall in oil has sparked some buying, and with banks likely having hit bottom, optimism may grow."

Japan's Nikkei share average .N225 rose about 1 percent to its highest level since July 2, led by sectors most sensitive to fuel prices, such as automakers.

Shares in the Asia-Pacific region excluding Japan .MIAPJ0000PUS edged up 0.6 percent to the highest level in more than three weeks, having bounced 8 percent from a 16-month low plumbed last week.