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GLOBAL MARKETS-Equities set 2-week low before Yellen speech, dollar dips
* MSCI All-Country World index hits lowest since Aug. 9
* Dollar index edges down
* Yellen may seek middle ground in rates debate -analysts
By Atul Prakash
LONDON, Aug 26 (Reuters) - Global shares slipped to a two-week low and the dollar edged down on Friday as investors turned cautious before a keynote speech by Federal Reserve Chair Janet Yellen that could map out a clearer path for U.S (Other OTC: UBGXF - news) . interest rates.
The MSCI All-Country World index was down 0.1 percent by 1041 GMT, after slipping to its lowest level since Aug. 9 earlier in the session. The pan-European STOXX 600 index also fell 0.1 percent.
Investors were wary of Yellen hinting at a near-term interest rate hike, which could divert some of the liquidity that has underpinned riskier assets worldwide, though others predicted she would strike a more equivocal note.
The dollar index, which tracks the currency against six major peers, slipped 0.11 percent to 94.675, while euro zone government bond yields crept up.
Recent hawkish comments from other Fed officials have raised expectations of a U.S. rate hike this year, though markets are not fully pricing one in till 2017.
"Markets are a bit worried about the upcoming comments from Yellen, which is understandable given how much of the market strength is due to central bank action," said Philippe Gijsels, head of research at BNP Paribas Fortis in Brussels.
"The fact that some of her disciples have indicated that it may be time to raise rates again has not done much in terms of calming sentiment. She (Munich: SOQ.MU - news) will probably try to strike a balance between an improving U.S. economy and risks abroad."
Chris Scicluna, head of economic research at Daiwa Capital Markets, took a similar line, saying: "Yellen won't be able to ignore the current debate but she can't make a commitment either because there's a range of views on the FOMC."
On Thursday San Francisco Fed President John Williams and Kansas City Fed President Esther George defended the need to raise rates, albeit gradually, to keep the U.S. economy from overheating.
Emerging equities were set for their first weekly loss in seven. The benchmark emerging market stocks index edged up 0.1 percent in wafer-thin trading, but was on course to end the week down 1.2 percent and in the red for the first time since the start of July.
Earlier in Asia, Japan's Nikkei index fell 1.2 percent after U.S. stocks closed modestly lower on Thursday. However, MSCI (Frankfurt: 3HM.F - news) 's broadest index of Asia Pacific shares outside Japan were flat.
On the commodities front, oil prices fell and was set for its largest weekly decline in a month after the Saudi energy minister tempered expectations of strong market intervention by producers during talks next month, and as analysts pointed to a supply overhang.
Zinc prices touched their highest level in 15 months as fresh shutdowns in China's steel sector added to mine supply concerns. As China steel mills shutter, steel prices lift, meaning the remaining mills can pay more for ingredients such as zinc.
Wariness ahead of Yellen's speech also gave spot gold a leg-up. It rose 0.3 percent, narrowing this week's losses.
For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Nichola Saminather in Singapore, Shinichi Saoshiro in Tokyo and Dhara Ranasinghe in London; editing by Ralph Boulton)
