By Nigel Stephenson LONDON (Reuters) - The dollar powered to a seven-year peak against the yen and a two-year high against the euro on Monday, extending gains after the Bank of Japan's latest stimulus and punishing oil and gold priced in the U.S. currency.
The BOJ's moves to lift growth and inflation raised expectations the European Central Bank, which meets on Thursday, would eventually resort to large-scale purchases of government bond, driving benchmark euro zone yields lower <GVD/EUR>.
However, data showing China's economy losing momentum tempered investors' mood, weighing on global stocks.
China's services sector grew at its slowest pace in nine months, the National Bureau of Statistics said, as a cooling property sector weighed on demand.
Another official purchasing managers' index survey on Saturday showed factory activity in the world's second-largest economy unexpectedly fell to a five-month low in October as firms fought slowing orders and rising borrowing costs.
"The optimism created by the Bank of Japan by increasing their purchase of quantitative assets has been hit by the Chinese manufacturing data released today, which fell well short of expectations," Naeem Aslam, chief market analyst at Ava Trade, said.
Final European manufacturing PMI data for October showed activity in France contracted by less than first reported while German factory activity rebounded after a slight shrinkage in September.
European shares dipped in early trade, pausing after sharp gains last week. The pan-European FTSEurofirst 300 index (FTEU3) was down 0.1 percent at 0900 GMT (4 a.m. EST).
MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) fell 0.5 percent, off a five-week high hit after the Bank of Japan on Friday expanded its huge stimulus spending in a stark admission that growth and inflation had not picked up as expected after a sales tax hike in April.
Tokyo stocks, which rose more than 4 percent on Friday, were closed on Monday for a holiday.
On Wall Street, both the Dow Jones Industrial average (DJI) and the S&P 500 (SPX) saw record closing highs on Friday.
STRONG DOLLAR
The yen came within a shade of 113 to the dollar on Monday and was last down 0.4 percent at 112.72.
"The big question is when is dollar/yen going to stop," said Jane Foley, a senior currency strategist at Dutch bank Rabobank in London.
"Part of the answer to that question lies not just with the Bank of Japan, but it lies with the Fed and the U.S. dollar and so it depends how much momentum the dollar can draw."
The euro hit a low of $1.2439, its weakest in more than two years. It was last down 0.3 percent at $1.2489 <EUR/USD>.
The dollar touched highs not seen since mid-2010 versus a basket of currencies.
The strong dollar and the Chinese data helped push crude oil prices lower. Brent crude was last down 0.6 percent at $85.33 a barrel.
Gold <XAU/USD> held close to four-year lows, also due to the strength of the U.S. currency. It last traded at $1,168.80 an ounce.
The Chinese numbers gave safe-haven German government bonds a lift as European markets opened. Ten-year German yields <DE10YT=TWEB> fell 2.6 basis points to 0.823 percent.
"There was a bit of risk aversion in overnight markets which is spilling over to the European open," said Rainer Guntermann, a strategist at Commerzbank.
(Additional reporting by Wayne Coe in Sydney, Blaise Robinson in Paris, Jehn Geddie and Jemima Kelly in London; Editing by Hugh Lawson)