* BOJ: trims rates, launches fund to buy assets
* Yen falls as far as 83.99 per dollar before paring losses
* Dollar falls to 8 1/2 month low
* RBA surprises by not raising rates; Asia buying lifts euro
By Jessica Mortimer
LONDON, Oct 5 (Reuters) - The yen fell on Tuesday after the Bank of Japan unexpectedly cut rates and launched a fund to buy assets while the Australian dollar fell sharply after the Reserve Bank of Australia surprised by not raising rates.
The euro gained against the dollar, pushing the dollar index to its lowest since late January. Traders reported Asian buying of euros as the U.S. currency stayed out of favour on expectations the Federal Reserve will implement fresh quantitative easing.
The yen fell after the Bank of Japan (BOJ), in the face of growing evidence that the yen's strength was hurting the Japanese economy, cut its overnight call rate target to 0-0.1 percent from 0.1 percent. It pledged to keep zero rates until prices stabilised, and said it would create a 5 trillion yen pool of funds to buy a wide range of assets.
The market had expected the central bank to adopt more gradual easing measures.
The dollar stalled just ahead of the 84.00 yen mark, however, and analysts said more intervention may be needed at some point to curb downside pressure on dollar/yen.
"The BOJ's move will cap yen appreciation, but they will need to come in and intervene if dollar/yen is to go beyond 85/86 -- or would need to see a trough in U.S. rates and yields which is the main driver of dollar/yen downside," said Societe Generale currency strategist Kit Juckes.
At 0808 GMT, the dollar was up 0.1 percent at 83.38 yen, having climbed as high as 83.99 yen on the BOJ decision.
The dollar hit a 15-year low of 82.87 yen last month, prompting Japanese authorities to intervene for the first time in more than six years.
"The BOJ's decision will reduce the risk of dollar/yen falling below 83 yen, although I still expect it will meet heavy offers around 85 yen," said Koji Fukaya, chief currency strategist at Credit Suisse.
In the past few sessions, concerns about the risk of more intervention has supported the dollar around 83.15 yen, but dollar sentiment has stayed bearish on speculation the U.S. Federal Reserve will resume quantitative easing.
The euro was up 0.8 percent at 114.95 yen and gained 0.7 percent against the euro to a session high $1.3777.
Traders reported Asian central bank buying of euros, while a U.S. bank was also seen buying, which drove it up from below $1.3700 to beyond $1.3750.
"It seems everyone is trying to stop their currency from appreciating except Europe," Societe Generale's Juckes said.
Expectations of fresh QE in the U.S. gained ground after Federal Reserve Chairman Ben Bernanke said late on Monday that more Fed asset purchases could further ease financial conditions.
The dollar index fell to an 8-1/2 month low of 78.021.
AUSTRALIA DISAPPOINTS WITH NO HIKE
The Australian central bank kept interest rates at 4.50 percent, surprising the market, which had priced in a 74 percent chance of a hike.
The Australian dollar fell more than 1 percent to a one-week low around $0.9541, slipping further away from a two-year high of $0.9751 hit late last week.
Some analysts said the Aussie's recent strength might have given the Reserve Bank of Australia (RBA) reason to pause, while speculation of quantitative easing in the U.S. and UK may have made it cautious.
Still, market players say Australia's hefty yield advantage over other major currencies was likely to support the Aussie.
"We've had hawkish talk from the RBA lately so it was a bit of surprise. But it's not like rate hike expectations have been completely dashed. I suspect the Aussie will be supported around $0.95," said Ayako Sera, strategist at Sumitomo Trust Bank.
The Aussie also fell against the Japanese yen to around 79.88 yen, down around 0.8 percent on the day.
(Additional reporting by Hideyuki Sano in Tokyo; Editing by Susan Fenton)