* Dollar index hits 8-month low at 78.616 .DXY
* Euro at 5-month high but hampered by Ireland/Portugal
* Dollar hits post-intervention low vs yen
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By Neal Armstrong
LONDON, Sept 29 (Reuters) - The ailing dollar fell more on Wednesday as sliding U.S. Treasury yields and below-forecast U.S. data fuelled expectations that U.S. monetary policy would need to be further relaxed.
Mounting speculation that the U.S. Federal Reserve could embark on a second round of quantitative easing (QE) knocked the dollar to a five-month low against the euro and a two-year trough against the Australian dollar.
"The market is jumping on QE expectations as it feels the U.S. data will force the Fed to do something, and I think that will be the case," said Manuel Oliveri, currency strategist at UBS in Zurich.
Analysts said the dollar could face further losses as a firm selling trend for the currency was taking hold.
"The backdrop for the dollar continues to deteriorate," JPMorgan said, advising clients to seize on any bounce in the dollar as a chance to sell.
At 0950 GMT the dollar index .DXY was down 0.3 percent at 78.733, close to an earlier eight-month low of 78.616.
Dollar weakness helped push the Australian dollar to a two-year high of $0.9730 AUD=D4 after a large option barrier at $0.9700 gave way.
The Swiss franc CHF= rose to a 2-1/2-year high against the dollar according to Reuters data at 0.9735 francs. Switzerland's leading growth indicator, the KOF economic barometer, eased one notch to 2.21 in September but still beat market expectations of 2.12.
The euro jumped to a five-month high of $1.3638 EUR= before a pullback to trade flat at $1.3585 after Standard and Poor's downgraded nationalised Anglo Irish Bank lower tier 2 debt to 'CCC'. [ID:nWLA4099]
Irish and Portuguese yield spreads blew out to euro lifetime highs against German bonds on Tuesday on concerns over those countries' fiscal deficits.
The euro has risen about 11 percent against the dollar so far in the July-September quarter and is on track for its biggest quarterly percentage gain in about eight years, according to Reuters data.
"The primary reason for the euro's rise has been declining confidence in the dollar and covering of stale euro short positioning," said Stephen Gallo, Head of Market Analysis at Schneider Foreign Exchange.
"There could be significant problems in store for the euro if the situation starts to look untenable in Ireland and Portugal."
YEN INTERVENTION JITTERS
The dollar also looked vulnerable against the yen, hitting its lowest since Japan intervened to sell the yen two weeks ago to drive the dollar up from a 15-year low.
The dollar fell 0.4 percent against the yen JPY= to 83.50 yen on EBS, its lowest since Sept. 15, when Japan intervened.
Many market players think Japan is likely to intervene again if the dollar threatens the 83 yen area as Japan's intervention began after it had hit a 15-year trough of 82.87 yen, but the impact of further intervention could be limited.
"Dollar/yen has to go lower in the end. The Bank of Japan cannot fight the fundamental trend," said Oliveri at UBS. (Editing by Hugh Lawson)