Hong Kong unrest caps stocks; dollar gains

Dollar hits near 2-year high against euro ahead of German inflation data

The dollar hit its highest in almost two years against the euro with German inflation data expected to keep pressure on the ECB to ease monetary policy further, while unrest in Hong Kong hurt Asian-exposed European shares.

The dollar was broadly stronger, hitting a four-year high against a basket of currencies, a six-year peak against the yen and a 13-month high against the New Zealand dollar. Reserve Bank of New Zealand data showed the central bank intervened last month to speed its currency's descent.

Data on Friday showing higher US growth in the second quarter fuelled speculation that a Federal Reserve interest rate hike may come sooner than expected, in striking contrast with the outlook for the European Central Bank.

"The strength of the dollar is forcing investors to move away from a lot of the stock market assets and put it into the greenback," said James Hughes, chief market analyst at Alpari.

"With a potential rate hike becoming more likely and the data showing constant improvement, it's no surprise we are seeing the positive move."

Near-zero inflation in the euro zone is nurturing expectations the ECB will eventually start printing money to buy government bonds, launching a programme known as quantitative easing, or QE.

Analysts polled by Reuters see German inflation at 0.8% in September, with euro zone inflation data due on Tuesday expected to show price growth at 0.3%. Spanish inflation came in at minus 0.3%, in line with forecasts.

The ECB meets on Thursday.

The euro earlier dropped to a 22-month low of $1.2664 and last stood at $1.2690, unchanged on the day.

The dollar index, which tracks the US unit against a basket of major rivals, climbed as high as 85.798. It was last flat at 85.627.

"I see no reason to think that the dollar's rally will come to an end any time soon... The main driving force - the divergence of monetary policy - is likely to remain in place for the next six months to a year at least," Marshall Gittler, Head of Global FX Strategy at IronFX.

The pan-European FTSEurofirst 300 index was flat at 1,376.98 points, as falls in Asian markets, fuelled by unrest in Hong Kong, capped a Wall Street-led rebound. Asia-exposed shares such as miner Rio Tinto, emerging market-focused lender HSBC and Richemont fell between 1% and 1.7% as riot police advanced on Hong Kong democracy protesters.

Hong Kong shares dropped 2.3% to three-month lows, hit by the worst unrest since China took back control of the former British colony two decades ago. MSCI's broadest index of Asia-Pacific shares outside Japan dropped 1.2%, hitting its lowest level since mid-May.

"Hong Kong is a real storm in a teacup but I'd sell HSBC after its outperformance," Justin Haque, a broker at Hobart Capital markets said. "This is another layer that adds to a gloomy outlook for October."

In the bond market, Italian and Spanish yields rose 4-5 bps to 2.43% and 2.25%, respectively, on the back of concerns about political instability.

Italian Prime Minister Matteo Renzi faces rumours that he could face pressure to quit, while the president of Spain's Catalonia region signed a decree on Saturday calling for a referendum on independence to be held on Nov. 9.