US Dollar hits two-month low

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Having been obsessed for months on when U.S. interest rates will start to rise, limp U.S. retail sales, the biggest fall in producer prices in eight months and a $22 billion hammering for the world's biggest retailer Wal-Mart, left traders thinking maybe, just maybe, they might have to fall again.

The dollar had dropped like a stone overnight, testing $1.15 per euro and sliced down though and 118.10 yen before finally finding some support.

That was as European Central Bank policymaker Ewald Nowotny said it was "quite obvious that additional sets of instruments are necessary," for the ECB to lift euro zone inflation back towards its near 2 percent target.

"Markets are pricing out a Fed rate hike and the dollar is crashing," said Aurelija Augulyte a senior FX strategist at Nordea in Helsinki.

"If you look at the very recent U.S. data there are signs of worry... If China doesn't recover and if the European data doesn't improve either there is a fair chance we could discuss further (Fed) easing," she added.

European shares snapped a three-day slide on the prospects of more central bank support. The regional FTSEurofirst 300 rose 1 percent after Asian bourses, which are also being lifted by hopes of stimulus from China and Japan, had hit their highest since mid- August.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.9 percent as Shanghai shares advanced 1.4 percent, Australian shares nudged up 0.7 percent and South Korea's Kospi climbed 1.2 percent.

Japan's Nikkei also gained 1.3 percent, as the second successive fall in Japanese manufacturers' kept the pressure firmly on policymakers to deploy fresh stimulus there.

"There seem to be considerable expectations of further economic stimulus, which could mitigate some of the deflationary pressures," said Gerry Alfonso, analyst at Shenwan Hongyuan Securities.

The prospect of a long delay to rate hikes boosted U.S. Treasuries, which saw the benchmark 10-year note yield fall as low of 1.9690 percent.

In Europe is was a similar story. German Bund yields were at their lowest level in two weeks as the prospect of another shot of ECB buying increased their appeal.

European Central Bank Vice President Vitor Constancio said a rate hike by the Fed could have greater global repercussions than in the past because the economy has changed and central banks have little experience of moving away from zero interest rates.

"The truth of the matter is that given the lack of historical precedents on what the impact of a major economy departing from a zero lower bound environment is, market analysts and policy makers do not have much of a choice other than 'learning in real time'," he said in Hong Kong.

But the chances of a Fed hike any time soon have all but evaporated follow a month-long run of disappointing U.S. data.

On Wall Street, the Dow lost 0.9 percent and the S&P 500 shed 0.5 percent overnight after a weak profit forecast from the shopping giant Wal-Mart's triggered its biggest share price fall since 1998.

Among commodities, oil struggled amid lingering concerns of a global supply glut and as the dollar started to stabilize.

Expectations of more Iranian supply following a nuclear deal and concerns that economic worries in China and Europe will weigh on demand have pressured oil this month.

Industrial metals got a fresh lift though with copper near a 4-week high and gold reaching a 3-1/2 month peak.

Emerging Asian currencies made the most of the earlier dollar weakness. The Indonesian rupiah hit its strongest in more than four months, South Korea's won touched a three-month peak and Malaysia's ringgit jumped more than 1 percent.