* Dollar under pressure as Fed's QE weighs
* Dlr index on track for largest weekly fall since 1985
* Euro set for biggest weekly rise since 1999 inception
* Kiwi racks up biggest weekly surge since 1985 float
(Changes byline and dateline, previous Sydney, updates quotes, prices)
By Kirsten Donovan
LONDON, March 20 (Reuters) - The dollar inched higher on Friday, but was still on track for its biggest weekly drop in 24 years against a basket of currencies as investors feared the Federal Reserve's plans to buy longer-term government debt would undermine the value of the world's main reserve currency.
The euro reversed earlier gains, easing back from above $1.37 as investors booked profits on this week's sharp rally and some cited concerns about weaker euro zone members.
The dollar has fallen over 5 percent against the basket of currencies this week, heading for its biggest weekly decline since 1985.
A fall of 5.2 percent at the close later on Friday would also make this week's dollar plunge the biggest since 1973 when the Bretton Woods system of fixed exchange rates was finally abandoned.
"Although it's too early to say it's a turning point, the Fed's decision to go down the QE (quantitative easing) route may be the first step of things stabilising and finding a bottom. The recession will still be prolonged and deep but it's a step in the right direction," said Christian Lawrence, an FX strategist at RBC Capital Markets.
The dollar has tended to rise in recent weeks along with falls in global appetite for risk as investors retreated to U.S. assets still seen as the safest bet as the global economy tanks.
But analysts said the Fed's decision to buy $300 billion of longer-term government debt and vastly expand its balance sheet beyond the current $2 trillion meant more and more of the U.S. currency would be created, giving a huge boost to the supply of dollars.
The Fed's historic move also drove Treasury yields down by the most in 26 years, reducing the dollar's yield allure, while raising inflationary risks in the longer term.
The dollar index was up 0.2 percent on the day at 83.281 having fallen as far as 82.631 on Thursday, the lowest in two months.
EURO EYES RECORD WEEK
The euro was 0.15 percent lower at $1.3646, having climbed to a peak of $1.3737 on Thursday, the highest since early January.
The common currency was up almost 6 percent from last Friday's $1.2922 close, the biggest increase since its inception in 1999.
But earlier gains were reversed after comments from a senior German lawmaker -- later denied by the ECB -- that euro zone countries had agreed a rescue plan to prevent members of the currency bloc going bankrupt.
"It's the end of the week and because there's been a big move higher, people who bought ahead of the FOMC or on the way up, they are going to take a bit of profit," said Adarsh Sinha, a currency strategist at Barclays Capital.
"The first reaction after the Fed was to sell everything but as the day moves on we might see some differentiation in what currencies people are buying against the dollar."
The dollar edged up 0.3 percent to 94.76 yen, after falling as far as 93.52 and having shed 4 percent on the week.
The New Zealand dollar was the biggest beneficiary of the dollar's woes and the revival of risk appetite, surging 7 percent on the week -- on track for its best week since the currency was floated in 1985. The kiwi was at $0.5598.
This week's dollar fall slowed after U.S. stocks fell on Thursday on concerns that the Fed's actions may be too costly. Investors were unsettled by the implications of the central bank's actions, fearing the moves could stir up inflation in the long term. (Reporting by Kirsten Donovan; Editing by Ruth Pitchford)