* Gold drops below $800, may target $750
* Five G7 economies shrinking
* Weak currencies don't mean strong equities - HSBC
(Updates prices, adds quote, European outlook)
By Kevin Plumberg
HONG KONG, Aug 15 (Reuters) - The U.S. dollar rose to a
six-month high against the euro on Friday as gold prices
tumbled to a 2008 low and oil slipped, leading investors to
increase bets on easing inflation and slower global growth.
European stock markets <> <> <> were
expected to open slightly higher, according to financial
bookmakers, with lower commodity prices helping concerns about
high costs.
The euro tumbled below $1.48 <EUR=> to the lowest since
Feb. 21, extending losses after data released on Thursday
showed the euro zone economy shrank in the second quarter for
the first time since records began in 1995.
Five of the Group of Seven rich nations have experienced
economic contraction this year, underscoring the dollar's
relative attraction with growth still holding up in the world's
largest economy and dragging crude prices back below $114 a
barrel.
"A lot of investors who have been buying commodities, not
just on a global growth story but as a hedge against a weak
dollar, are unloading those commodities based on a much more
constrained global outlook and going back into the dollar,"
said Tony Morriss, senior currency strategist with ANZ Bank in
Sydney.
The September U.S. light crude future fell $1.25 to $113.76
a barrel, with investors feeling more confident that a
ceasefire between Russia and Georgia would hold. Since hitting
a record $147.27 a month ago, oil has lost a fifth of its value
amid deep-seated worries about slowing demand from big
consumers like China.
A 1.5 percent decline in gold prices to $793.90 an ounce
<XAU=> in the spot market caused a landslide in other metals
prices, with silver plunging 11 percent <XAG=>, on track for
the largest daily decline since June 2006.
"We'll have some people targeting $750 (in gold), but I
think we would need to see a continuation in that dollar
strength to give it sufficient momentum to head that way," said
Darren Heathcote of Investec Australia in Sydney.
WEAK CURRENCY=WEAK STOCKS?
Asian equity markets edged lower as sentiment continued to
struggle and investors factored in to what extent potential
recessions in Britain, Europe and Japan would hit corporate
Asia's bottom line.
Japan's Nikkei share average ended up 0.5 percent <>
though it has remained in a relatively tight trading range for
the last month. Shares of exporters with brands well-known
overseas such as Canon Inc <7751.T> and Toyota Motor Co
<7203.T> were among the biggest boosts to the index, especially
with the U.S. dollar showing sustained strength.
However, currency weakness has not had a good track record
of foreshadowing stock market strength.
"History shows a strong and consistent correlation between
weak currencies and falling stock markets," said Garry Evans,
Asia-Pacific equity strategist with HSBC in Hong Kong.
"Weak currencies are a symptom of a deeper problem --
slowing economic growth, out-of-control inflation or structural
issues -- that reduce the attractiveness of equities," he said
in a research note.
Outside Japan, stocks in Asia-Pacific fell 0.7 percent to a
17-month low, according to an MSCI index <.MIAPJ0000PUS>.
Hong Kong's Hang Seng index <> was down 0.8 percent,
with offshore oil producer CNOOC Ltd <0883.HK> the biggest
drag.
The hallmark trade of the past year, betting on strength in
raw materials prices because of solid growth in developing
countries while selling off the unstable financial sector, has
been seriously tested in recent weeks as the U.S. dollar showed
sustained strength.
The currency and commodity component of that trade has
clearly shown signs of unraveling. Corn and wheat futures
traded on the Chicago Board of Trade fell sharply following the
move higher in the dollar.
But not all analysts are convinced that inflation has
peaked.
"There is still a lot of feed through from extremely high
commodity prices that have to get through to the economy around
the world," said Paul Schulte, regional strategist with Lehman
Brothers in Hong Kong. "We are still seeing some pretty high
inflation numbers all over," he said at a news briefing.
The euro was down 0.2 percent at $1.4775 <EUR=>, after
sinking to around $1.4750 earlier in the session.
The dollar was trading around 110.25 yen, up 0.4 percent
and just below a seven-month high hit earlier in the week.
Weakness in the metals markets knocked the Australian
dollar down 0.6 percent to US$0.8642 <AUD=>. Since mid-July,
when many commodity prices began to turn lower, the Australian
currency has dropped 12 percent.
