By Francesco Canepa
LONDON (Reuters) - The euro fell to a near one-year low against the dollar and euro zone stocks and bonds rallied on Monday as investors positioned for rising chances of further policy easing by the European Central Bank.
ECB President Mario Draghi said late on Friday that the bank was prepared to respond with all its available tools should inflation in the euro zone drop further.
Investors speculated this meant the ECB was more likely to embark on an asset purchase program, or quantitative easing, or adopt other stimulus measures in coming months which would weigh on the euro and boost assets such as stocks and bonds.
"The key message is that Draghi stands ready for more action if needed," Franz Wenzel, chief strategist at AXA Investment Managers in Paris, said.
"Whether they're going to do quantitative easing remains to be seen but we're fairly confident that the financial engineers at the ECB will find other tools. At this juncture, we don't exclude quantitative easing at the end of this year."
A weak German business sentiment index, Ifo, also added pressure on the euro in European trade, as it reinforced concerns about Germany, the euro zone's biggest economy.
The euro skidded to $1.3185
The euro zone's blue-chip Euro STOXX 50 index <.STOXX50E> was up 1.2 percent to 3,135.38 points after climbing to a three-week high in early deals. Both Germany's DAX <.GDAXI> and France's CAC 40 <.FCHI> gained 1.2 percent.
The MSCI All-Country World index <.MIWD00000PUS> was up 0.1 percent at 429.03 points.
"The ... market has interpreted Draghi's statement as meaning that broad-based asset purchases, or quantitative easing, has now become more likely," said Lutz Karpowitz, currency strategist at Commerzbank.
The Ifo business climate index dropped for a fourth straight month in August and the Ifo Institute said it was likely to cut its 2014 growth forecast for Germany to 1.5 percent from 2 percent.
Also sounding dovish was Bank of Japan Governor Haruhiko Kuroda who vowed over the weekend to press ahead with aggressive monetary easing for as long as needed to convince the public that deflation was dead and buried.
Kuroda's pledges of policy stimulus weighed on the yen
US RATES SEEN RISING EARLIER
In contrast, U.S. Federal Reserve Chair Janet Yellen on Friday gave a nod to the concerns of some Fed officials about the sustained level of monetary policy stimulus, even as she stressed the need to move cautiously on raising rates.
As a result, Fed funds futures fell back <0#FF:> as the market priced in the risk of an earlier rise in interest rates, while the dollar index <.DXY> rose to 82.563, its highest since September last year.
U.S. T-note futures
In commodities markets, the rising dollar pressured prices with spot gold
Brent crude dipped towards $102 a barrel on Monday as ample supply and a stronger U.S. dollar continued to pressure oil markets.
(Additional reporting by Anirban Nag and Marius Zaharia in London; Wayne Cole in Sydney; Editing by Susan Fenton)