* Dollar below 85 yen; dealers on Japan intervention watch
* Government bond yields fall, Fed seen buying debt soon
* Gold hits record high on way to $1,300/ounce
* Asia stocks up 0.7 pct but Nikkei dips
By Kevin Plumberg
HONG KONG, Sept 22 (Reuters) - Expectations that the Federal Reserve is closer to printing more money to support the U.S. economy lifted stocks and bonds on Wednesday, while the dollar hit a six-week low against the euro on a dwindling yield advantage.
Gold was in sight of $1,300 an ounce, having hit a record high in the wake of the Fed's statement that it was ready if needed to add more stimulus and that inflation was running below where it would like it to be.
Major European stock markets edged higher in early trade, following gains in most of Asia, while U.S. stock futures climbed 0.3 percent, pointing to a stronger opening on Wall Street later in the day.
Asiam stocks outside Japan rose 0.7 percent to a near two-year high, though trading volumes were thinned out by holidays.
The Fed's comments overnight increased the possibility that it will buy Treasuries, pushing up government bond prices.
The prospect of quantitative easing, a policy-driven expansion of money supply, also fueled expectations that investors will have access to even more cheaply borrowed money to buy riskier assets such as equities.
"The big beneficiary of more QE will be Treasuries," said Andrew Pease, senior investment strategist with Russell Investments in Sydney.
"The goal of QE will be to reduce long-term yields. The U.S. dollar is likely to weaken and it should eventually be positive for equities once investors have confidence that QE will reflate the economy," he said.
The falling dollar pushed up the yen sending the Nikkei share average into the red, and kept traders on high alert for any signs that Japan was intervening in markets again to push its currency back down.
Japanese Prime Minister Naoto Kan said intervention in the foreign exchange markets would be "unavoidable" if there was a drastic change in the currency. He also told the Financial Times in an interview that Tokyo planned a "total" package of measures that would boost domestic demand and help to weaken the currency. The dollar fell 0.2 percent against the yen to 84.92 yen just below where traders had thought Japan's central bank would support it.
Japanese authorities intervened in currency markets last Wednesday to weaken the yen for the first time since 2004, but the dollar has met selling pressure from exporters around 86 yen. Tokyo has not been seen in the market since.
DOLLAR OUTLOOK DARKENS
The euro rose to $1.3310 the highest since Aug 6, while the dollar weakened across the board.
"I doubt the market will step back from selling the U.S. dollar much for the time being until the U.S. data starts to improve," said Greg Gibbs, currency strategist at Royal Bank of Scotland in Sydney.
The relatively high yielding Australian and New Zealand dollars outperformed other liquid currencies, rising 0.3 percent and 0.6 percent, respectively, with dealers focusing on the widening yield advantage of these countries against U.S. bonds.
The 10-year U.S. Treasury future was up 0.1 percent while in the cash market the benchmark 10-year yield slipped a basis point compared with late on Tuesday in New York to 2.57 percent
The spread of the U.S. 10-year yield over the German 10-year yield has shrank to a negligible 8 basis points from around 40 basis points only two weeks ago.
The Fed's statement increased expectations the Bank of Japan could also ease policy further, pushing up Japanese government bonds. The 10-year JGB future was up 0.3 point in mid session trade.
Japan's Nikkei share average finished 0.4 percent lower on the day, though it has still risen around 8 percent so far in September. Those returns were roughly level with the U.S. S&P 500 index and exceeded the FTSEurofirst 300's 5 percent gain.
The MSCI index of Asia Pacific stocks outside Japan was at its highest since April 15. The index has climbed 10 percent in September.
However, some Asian exchange-traded funds, which have been receiving heavy inflows, may be near a peak.
"We believe inflows are likely to slow, as many of these ETFs are now technically overbought. In addition, we expect ETFs investing in Japan and Taiwan to continue to underperform their Asian peers due to persistent outflows," TrimTabs Investment Research said in a research report.
Equity trading volumes in Asia could be light on Wednesday with markets closed in China, South Korea and Taiwan because of public holidays.
Gold in the spot market was up 0.3 percent at $1,290.35 per ounce after reaching an all-time high earlier of $1,291.85. The precious metal has been driven by speculation that with advanced economies still more likely essentially to print money, inflation may not be too far off.
Crude oil futures drew support from the weaker dollar, rising 50 cents to $75.47 a barrel. (Additional reporting by Charlotte Cooper in TOKYO) (Editing by Kim Coghill)