GLOBAL MARKETS-Dollar down as monetary stimulus seen in pipeline

* US dollar trade-weighted index hits lowest since Jan

* Euro reaches five-month high versus dollar

* Gold extends rally, tops $1,313 an ounce

* Markets wary of weak US data, further QE from Fed (Updates first paragraph, prices, adds comment)

By Daniel Bases

NEW YORK, Sept 29 (Reuters) - Rising expectations central banks will step up monetary stimulus to support fragile economies drove the dollar to a five-month low against the euro on Wednesday and helped gold extend its record breaking rally.

U.S. equity markets gyrated in and out of positive territory on light trading volumes, while European shares ended lower. Oil rallied after a report showed low inventories for crude and related products. [ID:nN29198208]

There is mounting speculation the U.S. Federal Reserve may engage in quantitative easing -- a process of buying up bonds and other assets to put fresh cash into the economy rather than through lower borrowing costs -- sooner rather than later.

"The dollar currently is in a lose-lose situation where if U.S. data is disappointing, it increases the prospects of Fed easing and that weighs on U.S. rates and the dollar," said Brian Dolan, chief currency strategy at Forex.com in Bedminster, New Jersey.

"If the U.S. data comes in better than expected, then risk is back on, then the dollar is shunned as a safe-haven currency," he said.

Last week, the Fed said it was prepared to put more money into the economy if needed to stimulate the recovery and avoid deflation. The Fed's benchmark interest rate is already at zero to 0.25 percent, leaving no room to stimulate through conventional measures.

Spot gold edged up to a record high of $1,313.20 and silver set its best level in 30 years at $22.00 an ounce.

Wednesday's contrasting reports of Chinese and European economic and business sentiment advancing this month added to pressure on the greenback. [ID:nTOE68S046] [ID:nLDE68S0LU]

STOCKS SLIP

On Wall Street, the Dow Jones industrial average <.DJI> fell 9.99 points, or 0.09 percent, at 10,848.15. The Nasdaq Composite Index <.IXIC> dropped 1.57 points, or 0.07 percent, at 2,378.02

The Standard & Poor's 500 Index <.SPX> lost 1.45 points, or 0.13 percent, at 1,146.25. However, for the month the index is up nearly 9 percent, its best monthly performance since May 2009 and before that the best showing since March 2000.

Hewlett-Packard Co rose 2.6 percent to $42.72 after the computer and printer maker forecast 2011 profits above estimates. For details, see [ID:nN28273797]

European shares closed lower.

The FTSEurofirst 300 <.FTEU3> index of top European shares fell 0.55 percent to close at 1064.88. Weaker retail shares after disappointing figures from Swedish fashion group Hennes & Mauritz , the world's third-largest clothing retailer, proved a drag on market sentiment.

European banks <.SX7P> were down 1.3 percent.

Japan's Nikkei <.N225> closed up 0.7 percent, helped by quarter-end "window dressing" positioning and expectations that the BOJ will respond to the worsened outlook from Japanese manufacturers by further easing its policy when it meets on Oct. 4-5.

MSCI world equity index <.MIWD00000PUS> and the Thomson Reuters global stock index <.TRXFLDGLPU> both rose slightly.

For graphic on world asset market performance in Q3 and YTD: http://graphics.thomsonreuters.com/F/09/GLB_MKTQE.html

CURRENCIES AND DEBT

The dollar's weakness against the euro and the yen puts more pressure on exporters in Europe and Japan. The outlook isn't likely to change, said one bank.

"The backdrop for the dollar continues to deteriorate," JPMorgan said, advising clients to seize any bounce in the dollar as a chance to sell. "The increased focus on QE (quantitative easing) and the break of several key dollar support levels maintained the overall bearish bias."

The greenback fell versus major currencies, with the U.S. Dollar Index <.DXY> down 0.33 percent at 78.753.

The euro rose 0.30 percent at $1.362. The dollar fell 0.35 percent to 83.59 yen .

The threat of quantitative easing helped push the greenback to a two-year trough against the Australian dollar and a 2-1/2-year low versus the Swiss franc.

In Asia, where the Bank of Japan's yen sales are also akin to money printing, Japanese government bond futures hit a seven-year high.

Benchmark 10 year U.S. Treasuries were off 9/32 of a point in price, yielding 2.5 percent. (Additional reporting by Gertrude Chavez-Dreyfuss, Edward Krudy, Mike Dolan, Neal Armstrong, Joanne Frearson, Vikram Subhedar, Masayuki Kitano and Charlotte Cooper; Editing by Kenneth Barry)