Dollar climb hits commodities, stocks to close quarter lower

By Chuck Mikolajczak

NEW YORK (Reuters) - The dollar climbed on Tuesday after weak euro zone inflation data for September increased expectations of new stimulus from the European Central Bank, while world stock markets were on track for their largest quarterly drop in more than two years.

The dollar hit a four-year high against a basket of major currencies, putting the greenback on track for its biggest quarterly gain in six years, and a two-year high against the euro after consumer prices in the euro zone rose 0.3 percent year-on-year, slowing from 0.4 percent annual increases in August and July.

The inflation estimate boosted expectations for ECB President Mario Draghi to make clear when the ECB meets on Thursday that he is ready to take more stimulative action.

"The reason we saw this today was because of the inflation readings in the euro zone," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

"The dollar, based on the dollar index, is probably reaching a short term peak here. The prospects of the ECB moving as early as this Thursday might be somewhat exaggerated."

The dollar index of major currencies rose 0.4 percent to 85.954. The index has gained almost 8 percent over the last three months, the biggest quarterly gain since 2008 and a record-breaking 11 successive weeks of gains.

Commodities came under pressure with the dollar strength as gold touched a nine-month low before paring losses, with the metal set to post its sharpest monthly loss since June 2013 and the first quarterly loss this year on expectations of further gains in the U.S. currency.

Spot gold was off 0.7 percent at $1,206.65 an ounce, trimming losses after data pointing to unsteady U.S. growth, while copper was on track for its worst month since March and was last down 1.4 percent for the session.

Brent oil slumped below $95 a barrel, hit by dollar strength and ample supply, and suffered its deepest quarterly drop in more than two years.

Brent for November delivery settled down $2.53 at $94.67 a barrel, after hitting a more than two-year low of $94.24, for its worst percentage drop since January. It has lost nearly 16 percent in the third quarter, its biggest quarterly drop since April-June 2012.

U.S. crude settled down $3.41 at $91.16 a barrel, its worst drop since November 2012 and also notched its biggest quarterly fall since the second quarter of 2012.

Many analysts believe it is the beginning of a potentially seismic shift in the financial status quo, based on expectations the U.S. economy will outgrow Japan and the euro zone for years, pushing U.S. interest rates higher.

The euro sank below $1.26 for the first time since September 2012, hitting a low of $1.257 on trading platform EBS, an almost 1 percent drop. The euro later pared losses, to trade down 0.43 percent at $1.263.

MSCI's all-country world stock index of 45 countries was on course for a drop of more than 3 percent in September and its biggest quarterly fall since the second quarter of 2012, when the euro zone's debt crisis peaked.

The index edged down 0.2 percent while the FTSEurofirst 300 index of top European shares closed up 0.7 percent.

The Dow Jones industrial average fell 30.31 points, or 0.18 percent, to 17,040.91, the S&P 500 lost 6.08 points, or 0.31 percent, to 1,971.72 and the Nasdaq Composite dropped 14.18 points, or 0.31 percent, to 4,491.67.

The 10-year U.S. Treasury note was down 6/32 in price, yielding 2.5114 percent.

(Reporting by Chuck Mikolajczak; Editing by Chris Reese)