Dollar climbs, Hong Kong unrest hurts European stocks

The dollar was broadly stronger, hitting a two-year high against the euro, 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 weakening.

Data on Friday showing higher U.S. growth in the second quarter fueled speculation that the Federal Reserve may raise interest rates sooner than expected, in contrast with the outlook for the European Central Bank.

A key non-farm payrolls release on Friday is expected to add to the picture of the U.S. economy steaming ahead at the end of a busy week in terms of economic data.

"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 program known as quantitative easing, or QE.

German inflation met expectations at 0.8 percent in September, while Spanish consumer prices fell by 0.3 percent in line with forecasts. The data suggests euro zone inflation data due on Tuesday should show price growth at 0.3 percent, keeping the pressure on the central bank to ease policy further.

The ECB meets on Thursday.

The euro earlier dropped to a 22-month low of $1.2664 and last stood at $1.2704, a touch higher 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 lower at 85.567.

"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 0.43 percent at 1,371.11 points, as unrest in Hong Kong hit Asia-exposed shares such as HSBC, Standard Chartered or Richemont, the owner of jeweler Cartier.

Hong Kong shares dropped 2 percent to 2-1/2-month lows as riot police advanced on Hong Kong protesters in the deepest 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 rumors 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)