By Kevin Plumberg HONG KONG (Reuters) - The U.S. dollar fell on Friday, on track for the biggest weekly decline since 1985, while oil was pinned near 4-1/2-year lows under $40 after plunging overnight on a dismal outlook for energy demand. Tokyo stocks fell 1 percent ahead of a policy decision by the Bank of Japan, which could follow the Federal Reserve this week in cutting its benchmark rates closer to zero and taking more unconventional action to make commercial banks lend to each other. However, the financial sector still looked shaky, with HSBC shares down 7 percent on fears about whether Europe's largest lender will raise capital or cut its dividend. The dollar also remained under pressure after the Fed indicated this week it has embarked on quantitative easing, the final option of any central bank in which the financial system is immersed with cheap funds in an effort to revive lending. Prospects of an oversupply of dollars on the market and the belt-busting U.S. fiscal deficit has made dealers dump the currency. "A BOJ rate cut with additional steps may slow down the yen's appreciation against the dollar but the general trend of dollar weakness is likely to continue," said Masato Mori, senior manager at NTT Smarttrade in Tokyo. The dollar, still the world's foremost reserve currency, had served as a haven for investors during the bloodiest months of the financial crisis. A persistent decline could have a big impact on Asian central banks, exporters and companies with dollar-based revenues. The euro was up 0.3 percent at $1.4255, after having surged overnight to a near three-month high of $1.4720 on trading platform EBS. The euro has gained a stunning 20 cents in the last month as the euro zone's interest rate advantage was expected to hold for a while longer. The dollar was down 0.2 percent to 89.25 yen and fell as low as 87.13 yen, its weakest in more than 13 years, on Wednesday. An overnight bounce frayed the nerves of traders who are anxious the Bank of Japan could intervene to cap the yen's rise, but no evidence was found to support such a move. The trade weighted dollar is down 4.5 percent this week, heading for its biggest weekly fall since September 1985, according to Reuters data. CRUDE, COPPER UNDER PRESSURE A synchronized deep recession spanning developed economies around the world has hit emerging markets hard as well, sharply reducing raw material needs and dragging down prices of everything from copper to crude. Copper prices on the London Metal Exchange sank to the lowest in four years on Thursday. U.S. crude for January delivery fell as low as $35.98 a barrel on Thursday and recovered some to $36.40. In the last few months, oil has crumbled and is down 62 percent this year. Asian stocks were set to end of the last full trading week of 2008 with a whimper. The MSCI index of stocks in the Asia-Pacific region excluding Japan fell 1.4 percent. The index plunged 53 percent in 2008, easily the biggest annual decline since the gauge was launched in 1988. The region was not able to escape a global slowdown that accelerated following a shakeup in the structure of Wall Street banks and a sudden pullback in China's economic growth. However, some big investors still believe the long-term outlook of corporate Asia is bright. Battermarch, a unit of Legg Mason, said it favors Asian stocks related to domestic demand and infrastructure development. "Despite the larger Asian economies tending to be more susceptible than other emerging markets to the global economic slowdown, due to their trading partnerships, the outlook for Asia remains positive," said Ray Prasad, a senior portfolio manager with the firm who helps to oversee $5.2 billion in emerging markets equities. Hong Kong's Hang Seng index led the region lower, down 2.3 percent. In addition to HSBC, stocks of Chinese oil refineries also weighed on the broad market after Beijing slashed domestic fuel prices. PetroChina fell 3 percent and Sinopec slipped 1.7 percent. Longer-dated U.S. government bonds edged lower, as dealers squeezed what profits they could from a treacherous year for trading. However, the Fed's plan to buy late maturity Treasuries and government-sponsored agency securities to lower borrowing costs will likely support prices in the near term. The benchmark 10-year yield, which moves inversely to the price, was at 2.07 percent after falling as low as 2.04 percent overnight, the lowest since the 1950s. The yield has slumped around 200 basis points in 2008, with the lion's share happening in the last month. (Additional reporting by Kaori Kaneko in TOKYO; Editing by Dhara Ranasinghe)

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