* Dollar trade-weighted index hits lowest since Jan
* Markets wary of weak US data, further QE from Fed
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 fed profit taking in stocks.
Investors trimmed their U.S. and European equity positions while an uncertain economic outlook kept commodity prices from rallying too strongly despite the benefit they often get from a sagging U.S. dollar.
Spot gold
"We obviously have a negative combination for the U.S. dollar, and the Fed opening the door for potential easing has just stoked fears of dollar weakness and currency debasement generally," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.
Wednesday's contrasting reports of Chinese [ID:nTOE68S046] and European [ID:nLDE68S0LU] economic and business sentiment advancing this month added to pressure on the greenback.
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.
Last week, the Fed said it was prepared to do just that if it were necessary 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.
In midday U.S. trade, the Dow Jones industrial average <.DJI> fell 45.45 points, or 0.42 percent, at 10,812.69. The Nasdaq Composite Index <.IXIC> dropped 9.69 points, or 0.41 percent, at 2,369.90.
The Standard & Poor's 500 Index <.SPX> lost 5.52 points, or 0.48 percent, at 1,142.18. 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
Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco, said the market was technically overextended, but a recent pattern of buying on dips could re-emerge as fund managers "window dress" their portfolios.
European shares gave up earlier gains after the U.S. market opened weaker.
The FTSEurofirst 300 <.FTEU3> index of top European shares
was down 0.61 percent at 1070.77. Weaker retail shares after
disappointing figures from Swedish fashion group Hennes &
Mauritz
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 fell slightly. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^For graphic on world asset market performance in Q3 and ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^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, says 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 a basket of major trading-partner currencies, with the U.S. Dollar Index <.DXY> down 0.32 percent at 78.762.
The euro
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