* Dollar hits 8-mth low vs yen, within sight of 15-year low
* U.S. 2-yr yields fall after Fed steps to revive economy
* Euro, riskier FX fall vs dlr, yen as equities lose ground
(Updates prices, adds quote)
By Jessica Mortimer
LONDON, Aug 11 (Reuters) - The dollar fell close to 15-year lows versus the yen on Wednesday as steps taken by the Federal Reserve to revive a faltering U.S. economy pushed U.S. Treasury yields lower.
But the dollar rose against other currencies as investors pared back their exposure to risk, pushing the U.S. unit up 1 percent against a basket of currencies as European shares .FTEU3 fell 1.5 percent.
In a move to reinvigorate a weakening economic recovery, the Fed said on Wednesday it would use cash from maturing mortgage bonds it holds to buy more government debt to help pin down borrowing costs. [ID:nN09275781]
The move strengthened expectations that U.S. interest rates would stay at record lows, driving U.S. 2-year yields to a record low and narrowing the spread over Japanese two-year yields, which pushed the dollar down against the yen.
At the same time, however, investors were also concerned by what the Fed's move said about a faltering economic recovery, denting global stocks and lifting the dollar 1 percent against the euro and higher-yielding Australian dollar.
The U.S. currency dropped below 85.00 yen JPY= for the first time since late November, bringing it within reach of a 15-year low of 84.82 yen, soon after U.S. two-year Treasury yields hit a record low. [US/]
"The fall in U.S. yields is a barometer of the cyclical position of the U.S. economy," said Adam Cole, currency strategist at RBC.
"The market's reaction is that if the U.S. economy is slowing materially it will not be in isolation and it has therefore responded by selling risk instead of selling the dollar, which is positive for the yen".
At 1008 GMT, the dollar fell 0.4 percent to 85.09 yen JPY=, having earlier taken out an options barrier at 85.00 yen to hit an eight-month low of 84.98 yen on trading platform EBS.
The dollar/yen rate has recently shown a strong positive correlation with U.S. and Japanese two-year yield spreads, which have been shrinking.
Market players cited talk of stop-loss offers in the dollar near 84.80 yen and 84.75 yen, and large option barriers at 84.75 yen and 84.50 yen, suggesting that the dollar's drop against the yen could gain momentum if such levels are hit.
Against a basket of currencies, however, the dollar gained 1 percent to 81.613 .DXY, its strongest since late July, as the euro EUR= lost 1.2 percent to $1.3022 and the Australian dollar AUD=D4 slid 1.2 percent to $0.9022.
"Given the contrast with the BOJ's decision yesterday, we seem to have entered a situation where the yen is likely to rise," said Akira Hoshino, chief manager for the Bank of Tokyo-Mitsubishi UFJ's foreign exchange trading department.
The Bank of Japan kept interest rates steady and held off on new policy steps on Tuesday. But analysts said a drop in the dollar below 84.82 yen could trigger more market speculation about the possibility of Japanese intervention.
The yen gained across the board, with the euro down 1.6 percent EURJPY=R and the Aussie AUDJPY=R losing 1.7 percent as equity market falls encouraged investors to shun risk in favour of the low-yielding Japanese currency.
Elsewhere, sterling fell more than 1 percent against the dollar GBP=D4 after the Bank of England said UK inflation would fall well below its 2 percent target in two years even if interest rates stay low. [nKING] (Additional reporting by Masayuki Kitano and Rika Otsuka in Tokyo; Editing by Hugh Lawson)