U.S dollar hits 6-month high as oil, gold fall due to lower demand

The euro tumbled below $1.49 in early trade, coinciding with a sharp drop in gold prices to around $801.90 an ounce the lowest level since late December.

Asian stocks edged lower despite oil prices retreating for five of the last six days, as focus centered on the potential for further economic weakness, particularly after data showed Japan's wholesale inflation at the highest in 27 years. Â

In the past week, signs of economic weakness spreading in Europe and Japan have overshadowed worries about inflation and increased the chances for interest rates to move lower over time to spur growth.

"What's happening to the dollar has to do with a shift in relative growth and interest rate expectations," said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong.

"The currencies that have come under the most pressure especially over the last three or four days have been those where until recently inflation concerns dominated and now the slowdown in the global economy has generated a shift lower in interest rate expectations," he said.

The euro tumbled below $1.49 in early trade, coinciding with a sharp drop in gold prices to around $801.90 an ounce the lowest level since late December.

The dollar was up 0.2 percent against the yen at 110.25 yen approaching a seven-month high.

Weighting each currency on the basis of its U.S. trade importance, the dollar has risen 6 percent since mid July when oil prices peaked to a 2008 high against seven major currencies, according to Federal Reserve data.

The combination of dollar strength, dropping crude prices and rallying global equity markets have knocked gold down 18 percent since mid July and analysts said the precious metal could visit the high-$700 levels before the summer is over.

Japan's Nikkei share average fell 0.8 percent, led by clothing company Fast Retailing and Tokyo Electron Ltd, the world's second largest chip gear maker.

A government report showed wholesale prices rose 7.1 percent in July compared with a year ago period, the quickest pace since January 1981, spelling trouble for corporate profits and for Japan's economy, which many analysts believe may have lumbered into a recession.

"The current price rises aren't driven by strong demand so will be a drag on corporate and household activity. It's a negative for Japan's economy," said Takeshi Minami, chief economist with Norinchukin Research Institute.

Outside Japan, Asia-Pacific stocks fell 0.3 percent, close to retesting last week's 17-month low.

Hong Kong's Hang Seng index was little changed, held back by of China Mobile after Citigroup and UBS cut their price targets for the world's top mobile operator.

Oil prices slipped 0.4 percent to $114 a barrel after touching a three-month low of $112.72 on Monday.

After hitting an all-time high of $147.27 a barrel in July front-month U.S. light crude has tumbled nearly 22 percent on fears about slower demand from developed economies like Europe and emerging ones like China.