September 8, 2017 / 7:10 PM / in 10 months

GLOBAL MARKETS-Euro rally keeps dollar down; storms stoke worry in U.S.

* Dollar decline gathers momentum after Dudley speech

* Muddied outlook for U.S. rate hikes also hit dollar

* Euro extends rally, weighs on European shares

* Oil falls on Hurricane Irma; Harvey to hit 3rd-quarter U.S. growth

By Hilary Russ

NEW YORK, Sept 8 (Reuters) - The dollar slumped to near its lowest in more than 2-1/2 years on Friday as the euro continued to shine after European Central Bank President Mario Draghi's suggestion that the ECB may begin tapering its massive stimulus program this fall.

U.S. crude oil prices tanked more than 3 percent as powerful Hurricane Irma roared toward Florida. Gold retreated after touching a one-year high on lowered expectations of a December interest rate hike in the United States.

Stubbornly weak inflation continues to surprise Federal Reserve policymakers. In a speech on Thursday, New York Fed President William Dudley did not repeat an assertion from three weeks ago that he expects to raise rates once more this year.

Also dampening the dollar and lowering the chances of another rate hike was an agreement in Congress to push U.S. debt ceiling talks three months down the road to December, coinciding with the Fed's policy meeting.

Against a basket of other major currencies, the dollar was down 0.34 percent after touching a low of 91.011, its weakest since January 2015.

The safe-haven Japanese yen also strengthened 0.60 percent versus the greenback at 107.80 per dollar, and the euro rose 0.06 percent to $1.2028.

Draghi referred several times Thursday to the euro's strength and said it was the main reason for a cut in the bank's 2018-19 inflation forecasts. He also indicated any winding down of its massive stimulus program was likely to be slow.

Those comments did little to deter euro bulls, however, and a Reuters report that central bank officials were in broad agreement that their next step would be to reduce their bond purchases also supported the currency.

The ECB "left the mystery out there" with regard to tapering, said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York. "It creates a feeding frenzy, and the momentum that was there (in the euro) gets accelerated."

Oil prices fell sharply on worries that commerce and energy demand in Florida and the U.S. Southeast would be hit by Irma, one of the most powerful storms to near the United States in a century.

Irma is the second major storm to threaten the United States in two weeks after Hurricane Harvey shut a quarter of U.S. refining capacity and 8 percent of U.S. oil production.

U.S. crude fell 3.26 percent to $47.49 per barrel and Brent was last at $53.80, down 1.27 percent.

Economists have said Harvey could weight on U.S. economic growth in the third quarter.

Spot gold dropped 0.2 percent to $1,346.80 an ounce, off the one-year high it hit earlier.

U.S. shares were mixed in choppy trading. Investors were increasingly shifting focus to the hurricanes and worries that Pyongyang could launch another missile test on Saturday, North Korea's founding day, keeping risk appetite in check going into the weekend.

The Dow Jones Industrial Average rose 42.44 points, or 0.19 percent, to 21,827.22, the S&P 500 lost 0.21 point, or 0.01 percent, to 2,464.89 and the Nasdaq Composite dropped 28.93 points, or 0.45 percent, to 6,368.94.

Stocks elsewhere were slightly higher.

The pan-European FTSEurofirst 300 index rose 0.17 percent and MSCI's gauge of stocks across the globe gained 0.09 percent.

The U.S. 10-year Treasury yield fell to a 10-month low of 2.016 percent but then rose, with the benchmark notes last down 1/32 in price to yield 2.0628 percent.

Reporting by Vikram Subhedar and Christopher Johnson in London; Sruthi Shankar in Bengaluru; Sam Forgione and Gertrude Chavez-Dreyfuss in New York; Editing by Nick Zieminski and James Dalgleish

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