* Euro hits 5-month high vs dollar, buoyed by ECB tender
* Euro on track for biggest quarterly gain in 8 years
* Dollar index hits 8-month low; month-end flows dominate
* Better-than-expected U.S. data helps limit USD losses (Adds quotes, U.S. data, updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, Sept 30 (Reuters) - The euro hit a fresh five-month high against the dollar on Thursday, on pace for its best quarterly gain in eight years, after data showed euro zone banks are relying less on funds from the European Central Bank.
The news reinforced expectations Europe may gradually remove policy stimulus before major economies like the United States and Britain, helping offset concerns about Ireland's fiscal and banking problems.
The yen rose broadly on reported exporter demand for the currency on the last day of Japan's fiscal half-year. This sparked talk Japan may step in again to curb yen gains.
The euro's rally, however, seemed to be running out of steam in the short-term, analysts said, after reaching the 55-week moving average around $1.3613 and failing to take out the previous high of $1.3692 hit last April 12.
Midmorning in New York, the euro was up 0.2 percent at $1.3654.
As long as the euro holds above $1.3511, the previous 50 percent Fibonacci retracement of the November 2009 peak and June 2010 low, momentum remains positive. The currency is still on track to hit its 200-week moving average at $1.3916, traders said.
"The lower level of emergency borrowing combined with the expiration of previous ECB loans reduces the amount of liquidity in Europe's banking system, puts upward pressure on money market rates and signals a gradual normalization in conditions," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc in Washington.
The euro, however, pared gains versus the dollar after a stronger-than-expected business activity reading in the U.S. Midwest, with an index of 60.4, compared with forecasts of 56.
"This (Chicago PMI) was a solid number and certainly bodes well for the manufacturing sector. The positive data we've seen earlier in the day also contributes to the stabilization of the U.S. currency," said Joe Manimbo, currency trader, Travelex Global Business Payments in Washington.
"But despite the good numbers, the reports are not solid enough to prevent the Fed from adding more stimulus to the economy."
OPTIONS BARRIERS LOOM IN EURO/DOLLAR
In a day of heavy month- and quarter-end flows, investors opted to buy back the euro after it fell earlier on Ireland disclosing a worst case price tag of more than 50 billion euros to bail out its troubled banks.
The euro pushed through reported options barriers at $1.3650 and $1.3675 to hit a five-month high of $1.3684 on the EBS trading platform. Traders said there is another barrier at $1.3700 and every 25-point interval all the way to $1.38.
The Irish news was outweighed by data on Thursday showing banks borrowed 29.4 billion euros of six-day ECB funds, ensuring a far bigger-than-expected drop in excess liquidity as 225 billion euros of ECB loans expire. That signaled a healthier outlook for money markets..
The euro has risen almost 12 percent versus the dollar over the course of this quarter, its best quarterly performance since June 2002. On the month, the euro was up about 7.5 percent, its best monthly gains since December 2008.
Euro gains helped push the dollar index to an eight-month low against a basket of currencies,
The dollar index fell to an eight-month low of 78.414 and was last 78.507, down 0.2 percent. It has fallen more than 8 percent over the quarter, leaving it on track for its biggest quarterly fall since the second quarter of 2002heightening worries they may step in again.
The Ministry of Finance said Japanese authorities sold 2.1249 trillion yen ($25.37 billion) in currency intervention in the latest month to Sept. 28.
(Additional reporting by Vivianne Rodrigues and Wanfeng Zhou; Graphic by Scott Barber; Editing by Andrew Hay)