Dollar "currency of choice"; Hong Kong unrest hits stocks

By Marius Zaharia

LONDON (Reuters) - 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. Unrest in Hong Kong hurt Asian-exposed European shares.

The dollar was broadly stronger, reaching 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 U.S. growth in the second quarter fuelled speculation that the Federal Reserve may raise interest rates sooner than expected, in contrast with the outlook for the European Central Bank.

"The U.S. dollar has become the currency of choice," said Philip Shaw, chief economist at Investec.

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

Analysts polled by Reuters see German inflation at 0.8 percent in September, with euro zone inflation data due on Tuesday expected to show price growth at 0.3 percent. Spanish consumer prices fell 0.3 percent, 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 $1.2680, a touch lower on the day.

The dollar index, which tracks the U.S. unit against a basket of major rivals, climbed as high as 85.798. It was last a tad higher at 85.677.

"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."

World stocks were heading for their worst quarter since mid-2012, when the euro zone debt crisis peaked.

HONG KONG SPILLOVER

The pan-European FTSEurofirst 300 index was down 0.37 percent at 1,371.92 points, as unrest in Hong Kong hit Asia-exposed shares, such as HSBC, Standard Chartered or Richemont, the owner of jeweller Cartier.

Hong Kong shares dropped 2 percent to 2 1/2-month lows as riot police advance on Hong Kong protesters in 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 percent, hitting its lowest level since mid-May.

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

In the bond market, Italian and Spanish yields rose 5-6 bps to 2.45 percent and 2.25 percent, respectively, on concern about political instability. [GVD/EUR]

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.

The strong dollar helped push Brent crude oil below $97. [O/R]

(Additional reporting by Marc Jones, Jamie McGeever and Francesco Canepa; Editing by Toby Chopra, Larry King)