GLOBAL MARKETS-Dollar cruises to third weekly win, stocks bounce

* Wall Street set for rise, European shares climb 1 percent

* G7 finance ministers meeting begins in Sendai, Japan

* Sterling tops the list of major FX winners on fading Brexit view

* Fed's Dudley "quite pleased" markets increasing rate hike bets

* Gold (Other OTC: GDCWF - news) poised for biggest weekly drop in 8 weeks

By Marc Jones

LONDON, May 20 (Reuters) - The dollar cruised to its third straight week of gains on Friday and stocks and commodity markets showed signs that they too might be able to handle another U.S (Other OTC: UBGXF - news) . interest rate hike in the coming months.

Traders' risk appetite was gradually returning after a jittery few days and Wall Street was expected to rise as much as 0.3 percent, albeit remaining on course for what would be its fourth week and longest spell in the red since 2014.

The mood was brighter in Europe too as shares there were helped by higher commodity stocks and a 5 percent jump in Italy's biggest bank UniCredit (EUREX: DE000A163206.EX - news) on reports that it plans to sell parts of its business to improve its finances.

Britain's sterling meanwhile topped the weekly leaderboard of the major currencies as Brexit bets continued to fade.

The dollar, a dominant global market force for weeks now, was keeping close to two-month highs having passed both $1.12 per euro and 110 yen, buoyed by the week's sharp jump in rate hike speculation and U.S. Treasury yields.

"The question for traders now is whether this Fed rate hike issue is a 'risk-on' or a 'risk-off' situation," said Saxo Bank FX strategist John Hardy.

"Our interpretation is that they want to do a June move, especially now Brexit chances seem to have dropped right off."

The Swiss franc, the largest beneficiary among currencies of the shakiness that has clouded the global economy since the 2008 financial crash, was set to close at its weakest since a dramatic revaluation in January of last year.

German Bund yields were heading for their biggest weekly rise in a month while the euro was on course for its weakest week against the revitalised pound since October.

Currencies are likely to be a topic at the G7 finance leaders' meeting in Japan on Friday and Saturday. The meeting could expose differences on a range of issues from FX tinkering to broader fiscal and interest rate policies.

One thing seems sure, the talks are likely to spend plenty of time on the potential impact of high U.S. rates and potentially the dollar.

New York Federal Reserve President William Dudley, a permanent voting member of the central bank's rate-setting committee, said on Thursday there was a strong sense among Fed officials that markets were underestimating their rate hike plans.

Dudley said he was "quite pleased" investors had apparently increased bets that a rate hike would come soon.

Markets are now pricing in a 32 percent chance of a rate hike in June, according to the CME FedWatch tool, up from 15 percent on Tuesday. A majority now expect a rate hike at the July meeting.

"The Fed has regained the upper hand here," strategists at Brown Brothers Harriman said. "Moreover, the response by the dollar and the interest rate markets suggest monetary policy still matters."

$50 IN SIGHT FOR OIL

Continuing fears about supply outages in Canada and Nigeria bolstered crude oil even as the prospect of a higher dollar, prompted some investors to take profits after recent gains.

U.S. crude hovered at $48.11 a barrel, up over 4 percent for the week, while Brent crude looked to have given up on reaching $50 again as it stumbled at $48.65, up nearly 1.7 percent for the week and 75 percent since January.

The dollar's weight remained on gold as it headed for its biggest weekly decline in two month.

Spot gold hovered at $1,256 in Europe after losing 2 percent over the previous two sessions and roughly 1.5 percent for the week. Key industrial metal, copper was also on track for a third weekly fall.

Emerging market stocks were also feeling the pressure as they managed only a minor 0.5 percent rebound after a fourth straight week of losses. Hungary however was hoping to become the first emerging market in years later to see its credit rating lifted to investment grade.

MSCI (NYSE: MSCI - news) 's broadest index of Asia-Pacific shares outside Japan ended pretty much flat on the week having seen currencies there largely bow to the dollar.

Japan's Nikkei recovered from an early stumble to end the day up 0.5 percent and 2 percent on the week. Chinese shares were down for a fourth week though on nagging concerns about its economic health.

(Reporting by Lisa Twaronite; Editing by Toby Chopra)