GLOBAL MARKETS-Euro slides, dollar rises 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 against the U.S. dollar in six months on Thursday while the greenback rose against major currencies on expectations of diverging policy paths by the U.S. and European central banks.
The gain in the U.S. currency triggered the largest drop in gold prices in three weeks. Wall Street stocks fell alongside U.S. Treasuries prices as investors assessed when the Federal Reserve will begin to scale back its stimulus.
Market expectations that the Fed would continue its $85 billion a month bond-buying program well into next year were not fully met Wednesday at the end of the Fed's policy meeting, and some now see a chance for the U.S. central bank to begin a wind-down in December.
The current pace of purchases has pressured the dollar and driven Treasury yields lower, while boosting equities and some commodities. Those trends were partially reversed on Thursday.
In the euro zone, by contrast, inflation dropped to its lowest rate in nearly four years and raised speculation the European Central Bank will further ease monetary policy. The euro extended declines on the inflation data, and the greenback extended gains.
Adding to bets on Fed action, U.S. private industry data showed business activity in the U.S. Midwest greatly exceeded expectations in October, countering recent evidence of soft economic growth. New orders hit their highest level since 2004.
"The Chicago PMI spiked higher significantly, showing strength in manufacturing in that region, and the Fed is very data dependent," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.
"So there is going to be talk because of this that the Fed is closing in on tapering bond purchases."
The Dow Jones industrial average fell 73.01 points or 0.47 percent, to 15,545.75, the S&P 500 lost 6.77 points or 0.38 percent, to 1,756.54 and the Nasdaq Composite dropped 10.914 points or 0.28 percent, to 3,919.706.
The three major U.S. stock indexes posted gains for the month of October. For the month, the Dow added 2.8 percent, the S&P 500 gained 4.5 percent and the Nasdaq rose 3.9 percent.
The MSCI world equity index dropped 0.6 percent on Thursday, but rose for the month, up 3.9 percent in October.
U.S. Treasuries prices fell after the strong Midwest business activity reading, which checked some of the pessimism that fourth-quarter growth would be sluggish due to the partial government shutdown during the first half of October.
Benchmark 10-year Treasury notes last traded down 8/32 in price with a yield of 2.5560 percent. They were up as much as 7/32 in price with a yield of 2.502 percent earlier.
CURRENCIES, COMMODITIES RATTLED
The euro fell the most in six months versus the dollar, down 1.1 percent at $1.3581. The dollar index, which measures the greenback against six major currencies, added 0.6 percent to trade above 80 for the first time in two weeks, extending its five-session streak of gains to a total of 1.4 percent.
The euro was hurt further after the European Union's statistics agency reported that inflation in the 17-country euro zone unexpectedly dropped to a near four-year low in October and unemployment stayed at a record high in September. German retail and French consumer data also came in below par.
"The euro is slumping today and for good reasons. Inflation is falling, the economy is slowing down, the unemployment rate is over 12 percent, and all signals now point to an ECB that will turn from hawk to dove," said Jonathan Lewis, lead portfolio manager of the Samson STRONG Nations Currency Fund in New York.
The dollar strength weighed in commodities markets. Spot gold slumped 1.4 percent, the most in three weeks, while spot silver lost 3.2 percent, the most in more than a month.
Brent crude settled down 0.9 percent to $108.84 a barrel and U.S. crude fell 0.4 percent to $96.38.