* Dollar index limps up after biggest 1-day slide since 1985
* Fed decision to buy long-term Treasuries slams dollar
* Profit-taking tempers dollar's losses for now
* More selling eyed as European trade starts
By Masayuki Kitano
TOKYO, March 19 (Reuters) - The dollar limped higher on Thursday after suffering its biggest daily plunge since 1985 as the Federal Reserve stunned investors by saying it would buy long-term Treasuries in an effective printing of money.
The Fed said it would buy $300 billion of long-dated Treasuries over the next six months, its first large-scale purchases of government debt since the early 1960s, while also boosting buying of mortgage-backed securities and agency debt in its bid to rescue the economy.
The move stirred worries that the sharp expansion of the Fed's balance sheet -- which has already doubled in size in the past six months -- would spew dollars into global markets and lead to an oversupply of the world's main reserve currency.
Patrick Bennett, Asia FX and rates strategist at Societe Generale in Hong Kong, said the Fed had gone "all in" in its effort to revive the economy and stem its fall towards deflation.
U.S. Treasuries surged on the news, causing the biggest one-day drop in 10-year yields since the 1987 stock market crash, compounding the dollar's woes.
But the sharp drop in U.S. yields drove 30-year mortgage rates towards record lows, stirring hopes about the economic outlook and sparking a rally on Wall Street.
The gains in global stocks in the past week have also dented the dollar's safe-haven appeal, knocking it down from a three-year peak hit against a basket of currencies earlier in the month.
"The dollar was taken to the woodshed and beaten like a dog. And after a short rest, beaten like a dog again. Market sentiment on the Fed's manoeuvre was crystal clear," currency strategists at RBC Capital Markets said in a research note.
The dollar index, a gauge of its performance against a basket of major currencies, rose 0.2 percent to 84.324. But that came after a 3 percent slide on Wednesday that was its biggest one-day drop since 1985, and traders said the dollar may resume its fall.
"I think the dollar will continue to be sold across the board for the time being, over the next week or so," said Motonari Ogawa, a director at Barclays Bank in Tokyo.
The euro initially extended its gains on Thursday after jumping 3.8 percent on Wednesday for its biggest one-day rise since its launch in 1999, according to Reuters data.
The euro hit a two-month high of $1.3536 on trading platform EBS, but it later trimmed its gains and was down 0.1 percent from late U.S. trading on Wednesday at $1.3462.
In the near-term, the euro may have more room to rise against the dollar, market players said.
FURTHER DOLLAR WEAKNESS?
The euro could heads toward $1.4000, helped by its yield advantage over the dollar, Barclays' Ogawa said.
On Ichimoku charts, the euro broke above the bottom of the cloud -- a key resistance line -- on Wednesday and now faces resistance at $1.3635, which is where the top of the cloud now lies. Above that lies the 200-day moving average near $1.3900.
The Fed's actions may turn out to be positive for the dollar if viewed over the next six months to a year, said Tokichi Ito, deputy general manager for Trust & Custody Services Bank's forex team.
"It would be good if there was some kind of perfect medicine that could be prescribed that has no side effects, but there probably isn't any," Ito said.
"The measures are aimed at helping to stabilise financial markets and improving the economy over the medium to longer term, and if that is viewed positively or the situation improves, that could bolster the dollar's credibility," he said.
The Fed is not alone in conducting large-scale buying of government debt.
The Bank of England is buying 75 billion sterling of gilts and the Bank of Japan on Wednesday announced it would increase its purchases of Japanese government debt.
In addition, the European Central Bank may also eventually turn to non-standard policy measures after cutting interest rates to a record low 1.5 percent in March.
The dollar dipped 0.4 percent to 95.81 yen. The euro fell 0.6 percent to 129.01 yen after touching a three-month high of 130.32 yen earlier on Thursday.
Some traders said the yen was supported by the selling of dollars and euros against the yen by Japanese life insurers. (Additional reporting by Wayne Cole in SYDNEY, Shinji Kitamura in TOKYO and Eric Burroughs in HONG KONG; Editing by Chris Gallagher)