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

* Oil eases as focus returns to oversupply

* Dollar heads for third week of gains

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

By Herbert Lash

NEW YORK, May 20 (Reuters) - Global equity markets rose on Friday as investors took in stride the possibility the Federal Reserve might hike interest rates in June, a notion that helped U.S (Other OTC: UBGXF - news) . bond yields to rise and lifted the dollar to a third straight week of gains.

U.S. home resales rose more than expected in April, suggesting the American economy continues to gather pace during the second quarter. The data added to a growing perception the U.S. economy can withstand a rate hike next month or in July.

Wall Street was higher, following gains in Europe, with the S&P financial sector index rising 0.8 percent as recent comments from Fed officials suggested the possibility of a rate increase as early as June.

New York Fed President William Dudley said on Thursday the U.S. economy was strong enough to warrant a hike.

MSCI (NYSE: MSCI - news) 's all-country world stock index rose 0.84 percent and the pan-European FTSEurofirst 300 index of leading regional stocks closed up 1.26 percent to 1,326.45 points.

On Wall Street, the Dow Jones industrial average rose 108.93 points, or 0.62 percent, to 17,544.33. The S&P 500 gained 15.66 points, or 0.77 percent, to 2,055.7 and the Nasdaq Composite added 65.20 points, or 1.38 percent, to 4,777.73.

The dollar traded close to two-month highs after it pushed past $1.12 per euro for the first time since March. Sterling was set for its strongest week against the euro since October as fears abated that Britain would vote to leave the European Union next month in what is referred to as "Brexit."

"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."

Not everyone believes a rate hike is imminent.

The probability of a June rate hike has jumped to 30 percent from around 4 percent at the start of the week, according to CME Group's FedWatch site. Futures markets are predicting two rate hikes this year as opposed to just one as recently as last week.

"There is not enough data suggesting a rate hike is warranted," said Rahul Shah, chief executive of Ideal Asset Management, adding that equity gains were a relief rally.

The dollar index was slightly higher at 95.397 after reaching 95.502 overnight, a level last seen on March 29.

Against the yen, the dollar gained 0.48 percent to set another three-week high of 110.58 yen. The euro rose 0.07 percent against the dollar at $1.1210.

Japan and the United States remain at loggerheads over exchange-rate policy with Washington dismissing Tokyo's concerns that recent yen rises are excessive. Currency market stability is among topics financial leaders of the G7 advanced economies are discussing at a two-day gathering that kicked off Friday.

A stronger dollar spurred investors to cash in on a second week of oil price gains, with the focus remaining on the market's rebalancing as the global glut faced unplanned supply outages.

Global benchmark Brent crude prices slipped 8 cents higher at $48.73 a barrel.

U.S. West Texas Intermediate (WTI) crude futures traded down 30 cents at $47.86 a barrel.

U.S. Treasury yields, which move in the opposite direction of prices, rose to their highest in about two months.

Benchmark U.S. 10-year notes fell 1/32 in price, pushing their yield up to 1.8488 percent. Earlier yields hit 1.868 percent.

Gold edged higher after two days of losses but remained on track for its biggest weekly slide in nearly two months on growing expectations of a U.S. rate increase.

(Editing by Bernadette Baum and Nick Zieminski)