* Dollar drops to lowest since Japan intervened last week
* Dollar index eyes August low of 80.085
* Euro hits highest in nearly 7 weeks at $1.3312
By Charlotte Cooper and Masayuki Kitano
TOKYO, Sept 22 (Reuters) - The dollar fell on Wednesday to its weakest level on the yen since Japan intervened last week, fuelling speculation of more intervention after the Federal Reserve raised expectations it would print more dollars to help the U.S. economy.
The dollar hit its lowest in seven weeks against the euro and a basket of currencies, and dropped below 85.00 yen, which spurred speculation Japanese authorities may intervene to curb yen gains after they resumed intervention for the first time since 2004 last week.
The market had shied off selling the dollar aggressively down to 85.00 yen, fearing it might be an intervention trigger, but authorities were so far not seen in the market on Wednesday.
Greenback sales against the yen were said to be long liquidation from people who had been betting the dollar would get a lift from intervention.
Stop-loss dollar sell orders lay near 84.80 yen, 84.70 yen and 84.60 yen, one dealer at a major Japanese brokerage said, but there was also talk of dollar bids near 84.50 yen.
"It is completely a case of broad-based dollar selling," the trader said. "The focus is on whether or not there will be intervention and from where."
The Fed on Wednesday expressed greater concern about sluggish U.S. growth and low levels of inflation in a statement that many took as opening the door wider to pumping new dollars into the economy.
"The committee ... is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate," it said in the statement.
Greg Gibbs, currency strategist at Royal Bank of Scotland in Sydney, said the shift in Fed language to say that current levels of inflation were not consistent with its mandate meant it had left itself a low hurdle for taking further policy action.
"I doubt the market will step back from selling the U.S. dollar much for the time being until the U.S. data starts to improve," he said.
The dollar fell as far as 84.78 yen before creeping back to 84.92, two yen above a 15-year low of 82.87 set last Wednesday just before Japanese authorities intervened to send it three yen higher in a single day. It shed 0.2 percent on the day.
Japanese Prime Minister Naoto Kan kept intervention jitters alive by telling the Financial Times intervention was "unavoidable" if there was drastic change in the currency.
RACE TO THE BOTTOM
Compounding the dollar's problems was a fall in Treasury yields, with short-dated yields at record lows after the Fed's statement, narrowing yield spreads and making U.S. debt less attractive to Japanese investors.
While further steps by the Fed are seen as dependent on data, its statement highlights the gulf between the U.S. and the likes of Australia which is tightening policy, Deutsche Bank's global head of G10 FX strategy, Alan Ruskin, wrote in a note.
In a illustration of how dollar-negative the market reaction was, even the yen, with rates near zero, appreciated in the face of potential intervention.
"At a minimum it highlights what the Bank of Japan is up against," Ruskin said.
"Arguably this is a question of whether the BOJ printing press or the Fed printing press is more effective in the race to the bottom of who can weaken their currency more?"
The euro rose as far as $1.3312, up 0.4 percent after climbing 1.5 percent on Tuesday. It climbed through its 200-day moving average on Tuesday and chartists have said the next target is its August high of $1.3334.
The dollar index, a measure of its performance against a basket of six currencies, fell to 80.122, its lowest since early August when it troughed at 80.085. A break there would take it to its weakest levels since April.
The Australian dollar rose as far as $0.9583 to its highest since July 2008. (Editing by Joseph Radford)