* MSCI world index up 0.4% on Fed rate cut signal
* European shares gain 0.6%, touch six-week highs
* Oil jumps over 3% after Iran shoots down U.S. drone
* Dollar falls to six-month lows against the yen
* Bank of England holds rates steady; Norges Bank raises rates
* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh (Updates prices; adds Bank of England holds rates steady)
By Tom Wilson
LONDON, June 20 (Reuters) - World stock markets rose on Thursday after the U.S. Federal Reserve signalled it was likely to cut interest rates next month. The dollar fell and benchmark bond yields dropped to multi-year lows.
The Fed on Wednesday suggested rate cuts might start as soon as next month, saying it was ready to take action in the face of growing economic risks.
The MSCI world equity index, which tracks shares in 47 countries, gained 0.5% on the prospects of further stimulus, heading for a third day of gains. The Euro STOXX 600 rose 0.6% to six-week highs.
Wall Street futures indicated U.S. stocks were set to open 0.8% to 1.2% higher.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.4%, led by gains in China.
The dollar fell and benchmark U.S. and euro zone government bonds fell after the Fed’s move. The dollar fell 0.4%, on course for its biggest two-day drop against a basket of other currencies in 14 months, and dropped to a half-year low against the Japanese yen.
The Fed’s rate signal came before meetings at major central banks in Asia and Europe that were expected to flag similar moves. The European Central Bank and the Australian central bank had signalled earlier this week more policy stimulus was needed.
“It becomes a race to the bottom for global rates markets, a race to the bottom for FX,” said Peter Chatwell, head of rates at Mizuho.
The Bank of Japan left rates unchanged on Thursday but stressed that global risks were rising, suggesting it was leaning towards boosting monetary support.
Some central banks were prepared to move in the opposite direction, though. Norway’s central bank raised rates, as expected, sending the Norwegian crown up 1.7% against the dollar and 1% against the euro.
The Bank of England left rates unchanged, as expected, and maintained its message that rates would need to rise gradually - as long as Britain can avoid crashing out of the European Union without an agreement.
Still, some investors expressed doubt over how much cutting rates could do to improve growth.
“The big worry through all this is that central banks have become a little confident, perhaps overly confident, in their ability to fine-tune things like inflation and growth,” said Kevin Gardiner, global investment strategist at Rothschild & Co.
Elsewhere, oil prices jumped by more than 3% after Iran shot down a U.S. drone that its Revolutionary Guards said was flying over southern Iran, raising fears of a military confrontation between Tehran and Washington.
TRADE TALKS Geopolitical risks elsewhere persisted, although hopes grew for progress in U.S.-China trade talks. The world’s two biggest economies have imposed increasingly severe tariffs on each other’s imports.
Chinese and U.S. officials will hold trade talks following instructions from their leaders, the Chinese commerce ministry said on Thursday, adding that Beijing hoped Washington would create the necessary conditions for dialogue.
Christophe Barraud, chief economist at Market Securities in Paris, said stock markets had so far mostly dodged fallout from the trade war. He warned they could suffer if economic indicators worsen in the second half of the year.
“Equities are mainly benefiting from the easy money policy, without too much damage on the economic front,” he said. “That may change in H2 ... metrics will likely weaken through the world because of the impact of ongoing tariffs.” BOND YIELDS DROP The Fed’s dovish tone caused the 10-year U.S. Treasury’s yield to fall as low as 1.974%, its lowest since November 2016. It reached 2.8% in January.
Government bonds elsewhere also fell, some to near record lows. Germany’s 10-year government bond yield, a benchmark for sovereign debt in the euro zone, was down 2 basis points at -0.31%, testing this week’s record low of -0.329%.
Japanese 10-year bond yields fell to a three-year low of -0.160%, a drop of 2 basis points. The comparable Australian yield fell to a record low below 1.30%.
Brent crude futures were up $1.40 at $63.22 a barrel at 1109 GMT on the tensions in the Middle East and signs of improving demand in the United States.
For Reuters Live Markets blog on European and UK stock markets, please click on: (Reporting by Tom Wilson, additional reporting by Abhinav Ramnarayan and Helen Reid, editing by Larry King)