July 30, 2010 –   * Dollar hits 8-month low of 86.25 yen

* Traders look to U.S. Q2 GDP to slow

* Yen rises on Japanese exporters' month-end bids

* Euro steady near 12-week high, supported by dlr weakness

(Adds quote, updates prices, changes dateline prvs TOKYO)

By Tamawa Desai

LONDON, July 30 (Reuters) - The dollar fell to an eight-month low against the yen on Friday on concerns that GDP data would add to signs of fading momentum for the U.S. economic recovery and on a Fed policymaker's dovish comments.

Dollar bears are looking to U.S. second-quarter GDP due at 1230 GMT as a further opportunity to sell the currency, with growth forecast to slow to an annual 2.5 percent in the three months to June from 2.7 percent in the first quarter.

St. Louis Federal Reserve Bank President James Bullard, seen as one of the more hawkish members, said the risk of deflation in the United States has risen somewhat compared with the beginning of this year, and the Fed would need to act if the economy worsened significantly.

At 0718 GMT, the dollar was down 0.3 percent at 86.48 yen, after hitting an eight-month low of 86.25 yen on trading platform EBS. Stop-loss sales were seen below that level, while option barriers were cited at 86.00 yen, traders said.

"We're in a small window where U.S. economic data is underperforming and keeping pressure on the dollar," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

"Concerns about the U.S. economy and Fed easing will also put U.S. yields on the downside, which is a key driver for dollar/yen," he said.

In Asian trade, the dollar's fall was primarily driven by month-end selling from Japanese exporters, which overwhelmed buying from several Japanese investment funds launched Friday.

"We saw some month-end flows, in both directions, which dictated price moves today. But when the dust settles, the market will focus on economic fundamentals," said Hideaki Inoue, manager of forex at Mitsubishi Trust and Banking.

The yen took in its stride comments by Japanese Finance Minister Yoshihiko Noda saying he was closely watching the market. Deputy Finance Minister Motohisa Ikeda said he was worried about the impact of a rising yen on Japan's exports.

Market players have said they do not seriously expect Japanese authorities to intervene to stem the yen's rise until it goes beyond 15-year highs of 84.82 yen to the dollar.

The dollar index stood at 81.517, near a three-month low of 81.488 hit on Thursday.

EURO STEADY

The euro held steady at $1.3077, not far from a 12-week high of $1.3107 hit on Thursday, when data showed a jump in euro zone economic sentiment to a 28-month high and a decline in German unemployment.

Key technical resistance stood around $1.3120/25, which was the 38.2 percent retracement of the December 2009 high at $1.5141 to the June low of $1.1876, traders said. Previous resistance of $1.3050 was providing support.

A raft of surprisingly upbeat economic data from Germany and receding sovereign credit risk concerns have buoyed the euro.

That stood in contrast to the United States, which saw data undershoot market expectations.

The yen was also underpinned by speculation about the potential for fund repatriation flows into the yen related to redemptions of Spanish bonds.

There was some market talk that Japanese retail margin traders were buying back the yen, or may do so, on Friday ahead of the implementation of a new leverage cap starting on Aug. 1, when maximum leverage will be capped at 50 times collateral.

Traders will also keep an eye on the Institute of Supply Management Chicago's July index of manufacturing activity, which is expected to fall to 56.5 from 59.1 the previous month.

(Additional reporting by Hideyuki Sano in Tokyo)