* Dollar index hits 8-mth low, euro near 5-mth high
* Disappointing US data, lower yields and QE talk dent dollar
* Traders eye further euro gains to $1.37
* Dollar hit post-intervention low vs yen
* Market wary of potential for yen-selling intervention
By Masayuki Kitano and Charlotte Cooper
TOKYO, Sept 29 (Reuters) - The ailing dollar looked vulnerable to further losses against a swathe of currencies on Wednesday as falling Treasury yields and disappointing U.S. data fuelled talk that U.S. policy needed further easing.
Mounting speculation the Federal Reserve could embark on a second round of quantitative easing (QE) kept the dollar stuck near a five-month low on the euro and a two-year trough against the Australian dollar.
Analysts said more dollar losses could be had as a firm selling trend for the currency was taking hold.
"The backdrop for the dollar continues to deteriorate," JPMorgan said, advising clients to seize any bounce in the dollar as a chance to sell.
"The increased focus on QE and the break of several key dollar support levels maintained the overall bearish bias."
The dollar edged lower against a basket of currencies, hitting an eight-month low of 78.828 <=USD> <.DXY>.
Dollar weakness helped push the Australian dollar to a
two-year high of $0.9688
The euro held steady at $1.3589
The next resistance for the euro was seen at its April high of $1.3692.
The euro's rise the previous day came despite Irish and Portuguese yield spreads blowing out to lifetime highs against German bonds due to concerns over those countries' fiscal deficits.
The euro has risen roughly 11 percent against the dollar so far in the July-September quarter and is on track for its biggest quarterly percentage gain in about eight years, according to Reuters data.
Long positions in the euro do not seem overly stretched at this point despite its recent surge, said Kimihiko Tomita, head of foreign exchange at State Street Global Markets in Tokyo.
"If you ask whether institutional investors have been buying the euro, they have, but not to any particularly astonishing degree," Tomita said.
Although the euro does not look as if it is poised to fall because it has been overbought, persistent worries over the fiscal health of peripheral euro zone countries, are a risk factor, Tomita added.
"It would not be surprising to see it fall at any time. You have to wonder whether the euro can keep staying unhurt," he said.
YEN INTERVENTION JITTERS
The dollar also looked vulnerable against the yen, hitting a fresh low since Japan intervened to sell the yen two weeks ago to drive the dollar up from a 15-year low.
"The QE2 euphoria is still putting downward pressure on dollar/yen and the dollar in general," said Masafumi Yamamoto, chief FX strategist Japan, Barclays Capital.
"There is still a risk for test and break of 83. Fear of intervention lingers," he added.
The dollar fell 0.2 percent against the yen to 83.65 yen
Many market players think Japan is likely to intervene again if the dollar threatens the 83 yen area as Japan's intervention began after it had a 15-year trough of 82.87 yen.
But some analysts say it is risky to assume there is a line in the sand there.
Tohru Sasaki, chief FX strategist at JPMorgan Chase Bank, said Japan is likely to stay away from markets even if the dollar continues to fall.
"It will be difficult to conduct large scale intervention as Japan's forex reserves have piled up and also as China is letting the yuan rise to new highs," he said.
One trader said there were stop-loss offers in the dollar and option barriers from the 83.50 yen region down to the 83.20 yen area.
The yen showed muted response to the Bank of Japan's tankan corporate sentiment survey, which showed manufacturers turning more pessimistic about their outlook for the first time in almost two years. [ID:nTOE68R09G]
The data also showed large Japanese manufacturers assume the dollar/yen rate to be around 89.44 yen in October-March, way above the current levels. (Additional reporting by Koh Gui Qing and John Noonan in IFR in Sydney, Reuters FX analyst Rick Lloyd in Singapore, and Hideyuki Sano in Tokyo; Editing by Edwina Gibbs)