US dollar rallies against yen and euro, BOJ puts ECB in a bind

SYDNEY (Reuters) - The U.S. dollar powered to seven-year peaks against the yen on Monday and a two-year high on the euro, a punishing trend for commodities priced in dollars, with both gold and silver falling sharply.

Disappointing surveys out of China's manufacturing and services sectors highlighted the relative health of the U.S. economy, and piled pressure on other countries to ease monetary policy yet further.

The dollar came within a whisker of 113.00 yen in early trade, before taking a breather at 112.75. It has climbed over 3 per cent since the Bank of Japan stunned markets by doubling down on its already massive stimulus program.

The bold move has raised expectations the European Central Bank will eventually have to bite the bullet on quantitative easing, even if not at its meeting on Thursday.

"In this environment of subdued growth and long-term low-flation, we expect the ECB to announce the purchase of government bonds of euro area member states by early next year at the latest," said Apolline Menut, an analyst at Barclays.

That outlook is one reason the euro caved to a fresh two-year trough of US$1.2444, and why the dollar reached levels not seen since mid-2010 against a basket of currencies.

In commodity markets, gold was pinned near its lowest since 2010 at US$1,167.17 an ounce, as was silver at US$15.87. Brent oil edged up 6 cents to US$85.92 a barrel, while U.S. crude lost 9 cents to US$80.47.

While Tokyo stock were enjoying a holiday after Friday's 4.8 per cent surge in the Nikkei, shares across Asia were consolidating their gains.

MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.2 per cent from a five-week high. Australia's main index inched higher aided by another bumper result from one of the nation's big four banks.

The Straits Times Index was up 16.53 points or 0.5 per cent to 3,290.78 at about 10:30am.

On Wall Street, both the Dow Jones industrial average and the S&P 500 index had notched record closing highs on Friday. The Dow gained 1.13 per cent and the S&P 500 1.17 per cent.

Sentiment in Asia was somewhat tempered by a survey showing China's services sector grew at its slowest pace in nine months in October as a cooling property sector weighed on demand.

That followed an unexpected dip in China's factory activity to a five-month low in October, underlining the uncertain outlook for world's second biggest economy.

Still, the prospect of further policy stimulus helped support stocks and Shanghai gained 0.4 per cent.

The soft data knocked almost a full cent off the Australian dollar, which is often used by investors as a liquid proxy for bets on China.