Dollar hits low note while euro shines; storms stoke worry in U.S

By Hilary Russ

NEW YORK (Reuters) - Reduced expectations for another U.S. Federal Reserve interest rate hike this year helped drive down the dollar to its lowest in more than 2-1/2 years on Friday and kept gold near a one-year high.

The euro hit multi-year peaks in the wake of a European Central Bank meeting, while U.S. crude oil prices tanked more than 3 percent as powerful Hurricane Irma roared toward Florida.

Stubbornly weak inflation continues to surprise Fed policymakers. In a speech on Thursday, New York Fed President William Dudley did not repeat an assertion from three weeks ago that he expects to raise rates once more this year.

Also dampening the dollar and lowering the chances of another rate hike was an agreement in Congress to push U.S. debt ceiling talks three months down the road to December, coinciding with the Fed's policy meeting.

Against a basket of other major currencies, the dollar index was down 0.38 percent after touching a low of 91.011, its weakest since January 2015.

The safe-haven Japanese yen also strengthened 0.61 percent versus the greenback at 107.80 per dollar, and the euro rose 0.12 percent to $1.2036.

The euro's rally built on ECB President Mario Draghi's suggestion that it may begin tapering its massive stimulus program this fall.

Draghi referred several times Thursday to the euro's strength and said it was the main reason for a cut in the bank's 2018-19 inflation forecasts. He also indicated any winding down of its massive stimulus program was likely to be slow.

Those comments did little to deter euro bulls, however, and a Reuters report that central bank officials were in broad agreement that their next step would be to reduce their bond purchases also supported the currency.

The ECB "left the mystery out there" with regard to tapering, said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York. "It creates a feeding frenzy, and the momentum that was there (in the euro) gets accelerated."

Oil prices fell sharply on worries that energy demand would be hit by Irma, one of the most powerful storms to near the United States in a century, as it barrelled toward Florida and the U.S. Southeast.

Irma is the second major storm to threaten the United States in two weeks after Hurricane Harvey shut a quarter of U.S. refining capacity and 8 percent of U.S. oil production.

"Hurricanes can have a lasting effect on refinery and industry demand," said Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt.

U.S. crude fell 3.12 percent to $47.56 per barrel and Brent was last at $53.76, down 1.34 percent.

Economists have said Harvey could weigh on U.S. economic growth in the third quarter.

Spot gold was down 0.2 percent to $1,346.52 an ounce after hitting $1,357.54, its highest since August 2016. It was up 1.7 percent this week, notching a third consecutive weekly gain.

U.S. shares were mixed, with the S&P ending slightly lower as investors braced for Irma and fretted that Pyongyang could launch another missile test on Saturday, North Korea's founding day, keeping risk appetite in check going into the weekend.

The Dow Jones Industrial Average rose 13.01 points, or 0.06 percent, to end at 21,797.79, the S&P 500 lost 3.67 points, or 0.15 percent, to 2,461.43 and the Nasdaq Composite dropped 37.68 points, or 0.59 percent, to 6,360.19.

Stocks elsewhere were slightly higher.

The pan-European FTSEurofirst 300 index rose 0.17 percent and MSCI's gauge of stocks across the globe edged up 0.01 percent.

The U.S. 10-year Treasury yield fell to a 10-month low of 2.016 percent but then rose, with the benchmark notes last up 2/32 in price to yield 2.0559 percent.

Graphic - Harvey's energy impact: http://tmsnrt.rs/2xzso1S

Graphic - World FX rates in 2017: http://tmsnrt.rs/2egbfVh

Graphic - Global assets in 2017: http://tmsnrt.rs/2vUf2jJ

Graphic - Global bonds dashboard: http://tmsnrt.rs/2fPTds0

Graphic - Global market cap: http://reut.rs/2mcp7T1

Graphic - Emerging markets in 2017: http://tmsnrt.rs/2ihRugV

(Additional reporting by Sam Forgione, Gertrude Chavez-Dreyfuss, Julia Simon and Lewis Krauskopf and Caroline Valetkevitch in New York; Editing by Nick Zieminski and James Dalgleish)