GLOBAL MARKETS-Dollar sags as monetary stimulus seen in pipeline

* US dollar trade-weighted index hits lowest since January * 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 with New York close, adds comment, Tokyo futures)

By Daniel Bases

NEW YORK, Sept 29 (Reuters) - Rising expectations that 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. stock indexes gyrated in and out of positive territory on light trading volume, while European shares ended lower.

Oil rallied, ending at a seven-week high above $77 a barrel after a report showed low inventories for crude and related products. [ID:nN29198208]

Tokyo share prices appear poised to open lower on Thursday after making marginal gains on Wednesday. The December futures contract for the Nikkei 225 stock index <0#NK:> trading in Chicago fell 5 points to 9,555.

There is mounting speculation the U.S. Federal Reserve may engage in quantitative easing -- a process of buying up bonds and other assets to pour 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 set another record high of $1,313.20 an ounce before slipping to $1,309.10, up $1.70 in late New York trade. Silver set its best level in 30 years at $22.00 an ounce before dipping to $21.90, up 21 cents on the day.

STOCKS SLIP

On Wall Street, the Dow Jones industrial average <.DJI> fell 22.86 points, or 0.21 percent, to end at 10,835.28. The Nasdaq Composite Index <.IXIC> dropped 3.03 points, or 0.13 percent, to 2,376.56.

The Standard & Poor's 500 Index <.SPX> lost 2.97 points, or 0.26 percent, to end at 1,144.73. However, in September, a traditionally weak month for stocks, the S&P 500 is up 9.1 percent in September.

"The market is at a stage where it's trying to find out the right level. It seems like investors don't have a clear plan or strategy right now because September turned out so well," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Hewlett-Packard Co rose 2.2 percent to $42.53 after the computer and printer maker forecast 2011 profits above estimates. For details, see [ID:nN28273797]

The FTSEurofirst 300 <.FTEU3> index of top European shares fell 0.55 percent to close at 1,064.88. Retail shares fell after a disappointing profit margin from Swedish fast-fashion group Hennes & Mauritz , the world's third-largest clothing retailer, proved a drag on market sentiment.

European banks <.SX7P> were down 1.5 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

DOLLAR AND DEBT RETREAT

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."

Chinese and European economic and business sentiment advanced this month, adding to pressure on the greenback. [ID:nTOE68S046] [ID:nLDE68S0LU]

The greenback fell versus major currencies, with the U.S. Dollar Index <.DXY> down 0.30 percent at 78.776, not far above an eight-month low of 78.616 set earlier in the session..

The euro rose 0.32 percent to $1.3623. The dollar fell 0.27 percent to 83.65 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 the government debt market, the benchmark 10-year U.S. Treasury note fell 11/32 in price, yielding 2.50 percent, up from 2.46 percent late on Tuesday. (Reporting and writing by Daniel Bases; Additional reporting by Gertrude Chavez-Dreyfuss, Edward Krudy, Mike Dolan, Neal Armstrong, Joanne Frearson, Vikram Subhedar, Masayuki Kitano and Charlotte Cooper; Editing by Jan Paschal)