By Chuck Mikolajczak
NEW YORK (Reuters) - The dollar advanced on Tuesday after weak euro zone inflation data for September heightened expectations of stimulus from the European Central Bank, while world stock markets recorded 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 triggered a rise in 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, which measures the greenback versus six major currencies, rose 0.4 percent to 85.914. The index has gained 7.7 percent over the last three months, the biggest quarterly gain since 2008 and a record-breaking 11 successive weeks of gains.
The higher dollar pressured commodities, as gold touched a nine-month low before paring losses. The metal was down 6.1 percent for September, its sharpest drop since June 2013 and the first quarterly loss of the year on expectations of further gains in the U.S. currency.
Spot gold was off 0.6 percent at $1,208.50 an ounce, trimming losses after data pointing to unsteady U.S. growth, while copper closed out its worst month since March and was last down 1.1 percent for the session.
Brent oil slumped below $95 a barrel, hit by dollar strength and ample supply, and recorded its deepest quarterly drop in more than two years. [O/R]
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 percentage 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 dropped 3.4 percent in September and lost 2.8 percent for the quarter for 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. [.EU]
The Dow Jones industrial average fell 28.23 points, or 0.17 percent, to 17,042.99, the S&P 500 lost 5.48 points, or 0.28 percent, to 1,972.32 and the Nasdaq Composite dropped 12.46 points, or 0.28 percent, to 4,493.39.
The 10-year U.S. Treasury note was down 4/32 in price, yielding 2.5042 percent.
(Reporting by Chuck Mikolajczak; Editing by Chris Reese and Dan Grebler)