FOREX-Dollar slides after Fed, market wary of intervention

* 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 .

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.

"It is completely a case of broad-based dollar selling...the focus is on whether or not there will be intervention and from where," said a trader at a Japanese brokerage house.

Many traders suspect Japanese authorities may step in somewhere between 83.00-85.00 yen. Traders said Japanese authorities have called around banks to ask if they will be staffed on Thursday, a Japanese national holiday, in an apparent attempt to keep traders cautious over intervention.

"I suspect we may need to see the dollar fall a bit faster against the yen to trigger intervention for now. But they will probably intervene if the dollar falls below 83 yen," said another trader at a Japanese bank.

Last Wednesday, Japan intervened minutes after the dollar fell below 83 yen to a 15-year low, its first intervention since 2004.

The Fed 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. [ID:nTRU002490]

"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. [ID:nLDE68K2AL]

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. [US/]

While further steps by the Fed are seen as dependent on the strength of economic indicators, 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 after the Fed, 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.

A break of that high could put it on course to test $1.3520, the 50 percent retracement of its slide from November to June. After that, it may next test $1.3691, its high in April.

The dollar index <.DXY><=USD>, 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.

Spot gold hit a fresh record peak on Wednesday, its allure growing as speculation mounts that major currencies like the yen and dollar will see their value diluted by monetary easing. (Additional reporting by Hideyuki Sano; Editing by Edwina Gibbs)