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LONDON (Reuters) - The dollar fell to its lowest since August after weak U.S. data and company results, while a two-month high for Asian indexes helped world shares bounce back from two days of losses.
Having obsessed for months about when U.S. interest rates will start to rise, traders began thinking that maybe, just maybe, they might have to fall again, given limp U.S. retail sales, the biggest producer prices falls in eight months and a $22 billion hammering for the world's biggest retailer Wal-Mart [.N]
The dollar had dropped like a stone overnight, testing $1.15 per euro EUR= and slicing down to 118.10 yen JPY=. [FRX/]
It found some support as European Central Bank policymaker Ewald Nowotny said that it was "quite obvious that additional sets of instruments are necessary" to bring euro zone inflation back towards percent.
"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 .FTEU3 rose 1 percent after Asian bourses, also hoping for stimulus from China and Japan, hit their highest since mid-August.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 2 percent as Shanghai shares .SSEC advanced 2.3 percent, Australian shares nudged up 0.6 percent and South Korea's Kospi .KS11 climbed 1.1 percent.
Japan's Nikkei .N225 gained 1.15 percent, as the second successive fall in manufacturers' sentiment kept pressure on policymakers to do more.
"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.
Expectations of a long delay to rate hikes boosted U.S. Treasuries, taking the benchmark 10-year note yield US10YT=RR as low of 1.9690 percent.
In Europe, German Bund yields DE10YT=TWEB reached their lowest in two weeks as Nowotny raised hopes of more ECB bond buying. [GVD/EUR]
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.
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 .DJI lost 0.9 percent and the S&P 500 .SPX shed 0.5 percent overnight after a weak profit forecast from the shopping giant Wal-Mart's (WMT.N) triggered its biggest share price fall since 1998. [.N]
Goldman Sachs, Citi and Philip Morris are all due to report third quarter results later along with another dump of economic data. ECONG7 [.N] Wall Street's main markets are expected to start 0.6-0.8 percent higher. ESc1
Among commodities, oil struggled amid lingering concerns of a global supply glut and as the dollar started to stabilize [O/R]. Industrial metals got a fresh lift with copper CMCU3 near a 4-week high and gold XAU= reaching a 3-1/2 month peak.
Emerging Asian currencies made the most of the earlier dollar weakness. The Indonesian rupiah IDR= hit its strongest in more than four months, South Korea's won KRW=KFTC touched a three-month peak and Malaysia's ringgit MYR=MY jumped more than 1 percent.
"We are seeing continuous unwinding of bearish bets on emerging currencies generally, as views of 'no U.S. hike this year' are growing," said Seungji Jeon, Samsung Futures' FX analyst in Seoul.
Editing by Toby Chopra/Ruth Pitchford