GLOBAL MARKETS-Euro tumbles, dollar gains on central bank views


* U.S. stocks flat on caution after Fed meeting

* Euro falls the most in 6 months versus U.S. dollar

* Treasuries prices down after strong U.S. data

By Rodrigo Campos

NEW YORK, Oct 31 (Reuters) - The euro fell the most againstthe dollar in six months on Thursday while the dollar roseagainst major currencies on expectations of diverging policypaths by the U.S. and European central banks.

The greenback's advance sent gold prices to their largestdrop in three weeks. Wall Street stocks were little changed andU.S. Treasuries prices fell as investors assessed the likelihoodof when the U.S. Federal Reserve will begin to scale back itsstimulus, while a gauge of global equities fell the most in aweek.

The Federal Reserve's outlook on Wednesday at the close ofits policy meeting was perceived as less dovish than expected.

By contrast, a drop in euro zone inflation to its lowest innearly four years reported on Thursday raised speculation theEuropean Central Bank will further ease monetary policy. Theeuro fell on the inflation data, and the greenback extendedgains.

Market expectations that the Fed would continue its $85billion a month bond-buying stimulus well into next year werenot fully met Wednesday, and some now see a chance for the Fedto begin a wind-down in December.

The current pace of purchases has pressured the dollar anddriven Treasury yields lower, while boosting equities and somecommodities. Those trends were partially reversing on Thursday.

Data that showed business activity in the U.S. Midwestsurged in October, greatly exceeding expectations, counteredrecent evidence of soft economic growth. New orders hit theirhighest level since 2004, countering recent evidence of softeconomic growth.

"The Chicago PMI spiked higher significantly, showingstrength in manufacturing in that region, and the Fed is verydata dependent," said Tim Ghriskey, chief investment officer ofSolaris Group in Bedford Hills, New York.

"So there is going to be talk because of this that the Fedis closing in on tapering bond purchases."

The Dow Jones industrial average fell 12.33 points or0.08 percent, to 15,606.43, the S&P 500 gained 0.28points or 0.02 percent, to 1,763.59 and the Nasdaq Composite added 4.911 points or 0.12 percent, to 3,935.531.

The pan-European FTSEurofirst 300 index was up 0.4percent to hit a five-year high, and posted a second straightmonth of gains with a rise of 3.7 percent in October.

The MSCI world equity index dropped 0.4percent, with its October gain above 4 percent.

U.S. Treasuries prices fell after the strong Midwestbusiness activity reading, which cut into pessimism thatfourth-quarter growth would be sub-par due to the federalgovernment partial shutdown during the first half of October.

Benchmark 10-year Treasury notes last tradeddown 8/32 in price with a yield of 2.5542 percent. They were upas much as 7/32 in price with a yield of 2.502 percent earlier.


The euro fell the most in six months versus thedollar, down 1 percent at $1.3592. The dollar index,which measures the dollar against six major currencies, added0.5 percent to trade above 80 for the first time in two weeks,extending its five-day streak of gains to a total of 1.3percent.

The euro was hurt further after the European Union'sstatistics agency reported that inflation in the 17-country eurozone unexpectedly dropped to a near four-year low in October andunemployment stayed at a record high in September. German retailand French consumer data also came in below par.

"We have had a nasty combination of a lack of inflationarypressures and record unemployment, and the market'sinterpretation is that the ECB may sit up and take notice," saidJeremy Stretch, head of currency strategy at CIBC.

The dollar strength weighed in commodities markets. Spotgold slumped 1.7 percent, the most in three weeks, whilespot silver lost 3.7 percent, the most in more than amonth.

Brent crude fell 1.1 percent to $108.68 a barrel andU.S. crude fell 0.4 percent to $96.35.

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