* Dollar index close to lowest since February
* Euro holds recent gains, near four-month peak
* Investors look to Bank of Japan policy meeting this week
By Jessica Mortimer
LONDON, Sept 17 (Reuters) - The dollar stayed close to a seven-month low on Monday and was expected to remain weak after the U.S. Federal Reserve last week embarked on a new bout of aggressive monetary stimulus, with any recovery likely to be modest.
The dollar index, which measures the U.S. unit’s value against a basket of currencies, stood at 78.867, having fallen as far as 78.601 on Friday, a level last seen in late February.
The euro held not far from a four-month high versus the dollar, buoyed both by the Fed measures and the European Central Bank’s outlining earlier this month of its plan to lower borrowing costs for indebted euro zone countries.
Traders said some investors may be tempted to book some profit at current higher levels, though analysts said the broader trend was for the common currency to gain further.
The euro was down 0.1 percent at $1.3109, off a peak of $1.31691 reached on Friday though it held above reported bids around $1.3080. It has gained around 9 percent since hitting a two-year low of $1.2042 in July.
“The euro is still likely to move a bit higher. The momentum is not over yet,” said Steve Barrow, head of G10 currency research at Standard Bank.
“It may see a dip down towards $1.30 again but it won’t go much below that ... Maybe the market will tend to consolidate around here but I would be more inclined to buy on dips than to sell on strength.” He said the euro could rise towards $1.3250-$1.3300 over the next week or so.
The euro’s gains have gathered pace since the U.S. Federal Reserve said last week it would buy $40 billion a month of mortgage-backed securities until the jobs market improved, which encouraged investors to sell the dollar.
“It’s a combination of improvements in Europe and deteriorating dollar sentiment ... We could trade below $1.30 again but will see $1.35 by year-end,” said Daragh Maher, currency strategist at HSBC.
The euro also hit an eight-month high against the safe-haven Swiss franc of 1.21849 francs on EBS.
Markets are waiting to see if Spain will ask for help to tackle its debt.
Some analysts said Madrid appeared to be paving the way for requesting such assistance after it said it would set clear deadlines for structural reforms by month-end.
The dollar was steady at 78.38 yen, holding above a seven-month low of 77.13 yen hit on Thursday after the Fed unveiled its monetary stimulus.
Investors are focused on how Japanese authorities might respond to the yen’s latest rise versus the dollar. Market jitters about the potential for yen-selling intervention by Japanese authorities helped limit the dollar’s drop last week.
“When we broke down through 78 yen people were beginning to wonder. They (Japanese authorities) last intervened when it was at 76 so I don’t really feel we are quite on the cusp of intervention, although the language has been stepped up,” said HSBC’s Maher.
Japanese Finance Minister Jun Azumi repeated on Friday his warning to markets against pushing up the yen too much, saying authorities would take decisive action if necessary and would not rule out any measures.
The Australian dollar dipped 0.2 percent to US$1.0520, off a six-month high of $1.0625 set on Friday. Market players said the currency’s strength was likely to be limited by concerns about slowing growth in China, Australia’s biggest export market.