Dollar Hits Eight-Month High On Rate Views, Metals Sink

By Caroline Valetkevitch

NEW YORK (Reuters) -- The dollar rose to an eight-month high on Monday amid heightened expectations that the U.S. Federal Reserve might raise interest rates next month, driving down the prices of copper, gold and other metals.

World equity markets slipped, with U.S. stocks ending slightly lower in quiet trading after a week of strong gains.

Worries that a buoyant dollar could discourage producers from cutting supply despite weak demand weighed on base metals prices. Copper fell to its cheapest in six months before recovering.

The dollar index, which measures the greenback against six major currencies, rose as much as 0.4 percent, touching 100.000, an eight-month high not far from this year's peak of 100.390.

San Francisco Fed President John Williams on Saturday cited a "strong case" for raising rates when Fed policymakers meet next month, as long as U.S. economic data does not disappoint. His comments overshadowed Monday's lackluster U.S. manufacturing and housing reports.

"For him to acknowledge that there's a strong case for higher rates next month is a strong signal to the market that there's increasing consensus at the Fed that rates are likely to rise next month," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

A big healthcare deal failed to impress U.S. stock investors. Pfizer's announcement of what is expected to be the biggest-ever healthcare deal pushed its shares down 2.6 percent, making it one of the biggest drags on the S&P. Target company Allergan closed 3.4 percent lower after the $160 billion deal announcement.

The Dow Jones industrial average fell 31.13 points, or 0.17 percent, to 17,792.68, the S&P 500 lost 2.58 points, or 0.12 percent, to 2,086.59 and the Nasdaq Composite dropped 2.44 points, or 0.05 percent, to 5,102.48.

"We're coming off a very strong performance, a market that has shown tremendous resilience and a strong propensity of coming back," said Andre Bakhos, managing director at Janlyn Capital LLC in Bernardsville, New Jersey.

The MSCI index of global stock markets fell 0.3 percent, and a broad gauge of European stocks ended down 0.3 percent, pressured by commodity-related losses.

Three-month copper in London hit a low of $4,443.50 a ton before recovering to end at $4,490, down 2 percent. LME nickel fell as far as $8,175 before ending down 5 percent at $8,300. Spot gold was down 0.9 percent at $1,068 an ounce. Silver hit its lowest level in more than six years.

The Thomson Reuters Core Commodity CRB index hit its lowest since November 2002 before bouncing back. It was last down 0.2 percent.

Crude oil prices ended flat to lower, erasing earlier gains on supply worries. That offset Saudi Arabia's pledge to work on price stability. Brent futures settled up 17 cents at $45.83 a barrel, while U.S. crude finished down 15 cents at $41.75.

U.S. Treasuries prices rose as a solid two-year note auction renewed demand for longer-dated bonds. Benchmark 10-year notes were up 4/32 in price to yield 2.246 percent, down nearly 2 basis points.

(Additional reporting by Rodrigo Campos and Dion Rabouin in New York, Maytaal Angel in London and Abhiram Nandakumar; Editing by Nick Zieminski, Bernadette Baum and Jonathan Oatis)