* Dollar falls to 15-year low against the yen
* Dollar index drops to 8-1/2-month low
* Euro hits fresh 8-month high vs dollar (Updates prices, adds quote)
By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 6 (Reuters) - The dollar tumbled to a new 15-year low against the yen and an eight-month trough versus the euro on Wednesday on expectations the Federal Reserve will ease monetary policy to jumpstart a slumping U.S. economy.
A private-sector report from payrolls processor ADP, a precursor to Friday's U.S. non-farm payrolls data, suggested the U.S. labor market remained anemic in September, kicking of a slew of dollar-selling across the board.
The jobs data bolstered the case for another round of quantitative easing, a dollar-negative scenario consisting of asset purchases meant to push long-term yields lower. Some analysts expect the Fed to announce these easing measures at its November policy meeting.
"Dollar selling just continues and we saw two-year yields at a new low and for the last month and a half there has been a high correlation between the weakness in the dollar and lower yields," said John McCarthy, director of FX trading at ING Capital in New York. "This is all predicated on the likelihood of more quantitative easing."
In contrast, the euro has proven resilient to fiscal debt and banking problems in some of the euro zone's peripheral countries. Fitch, for instance, downgraded Ireland on Wednesday.
Despite the cut, the euro rose above its 200-week moving average around $1.3921 to reach its highest level since February. Markets took out an options barrier at $1.39 as traders braced for more gains in the single currency.
In late trading, the euro gained 0.7 percent to $1.3930 in volatile trading, swinging between losses and an eight-month high of $1.3949 on the EBS platform
The single currency was helped earlier by data showing a surge in German manufacturing orders in August.
FURTHER EURO GAINS
The next big level is $1.3958, the 50 percent retracement of the move from the July 2008 peak at $1.6040 and the June 2010 low at $1.1876. After $1.3958, investors will focus on $1.40, a key level where investors tend to take profit.
Goldman Sachs is now forecasting further gains in euro/dollar at $1.40, $1.50 and $1.55 on a 3-, 6- and 12-month basis.
Against the yen, the dollar dipped as low as 82.75 yen on electronic trading platform EBS before recovering to 82.96 yen, still down 0.3 percent on the day. The session peak was only 83.27 leaving the dollar/yen trading in a tight range despite the extreme low.
Wednesday's low was below 82.87 where the Bank of Japan moved to weaken the yen on September 15. The greenback was well below the high of 83.99 yen it hit on EBS after the Bank of Japan (BOJ) announced easing steps on Tuesday.
Investors were reluctant to push the dollar too low against the Japanese currency over fear of a new intervention.
"I do not think there will be intervention before the (IMF-G7) weekend meeting but there could be verbal intervention or short-covering," said Greg Michalowski, chief currency analyst at the New York-based online forex broker FXDD.
"The dilemma is that both the U.S. and Japan want a weak currency. The pair is testing trendline (resistance) at 83.04."
The dollar was down 0.4 percent against a basket of currencies at 77.4350, having fallen as far as 77.301.
The dollar's steady drop prompted talk of an escalating global currency war, ahead of the IMF-G7 meetings this weekend, with emerging countries growing increasingly edgy about the flood of capital inflows from advanced economies.
Though he did not mention any names, U.S. Treasury Secretary Timothy Geithner on Wednesday took a not-so-subtle dig at China when he said countries running big trade surpluses need to let their currencies rise or risk triggering a destructive round of competitive devaluations.. (Additional reporting by Nick Olivari; Editing by Andrew Hay)