* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
* European shares open higher
* MSCI ACWI index up 0.5%, best day in over two weeks
* Crude bounces after Trump says U.S. Navy destroys Iranian drone
* Dollar gains 0.1%, rate cut bets cap gains
By Ritvik Carvalho
LONDON, July 19 (Reuters) - Global stocks rose on Friday as investors firmed up bets on a U.S. interest rate cut at the end of July after a speech by a top Federal Reserve official further cemented expectations for one, fuelling appetite for risky assets and capping the dollar.
European shares opened higher across the board, but had given up gains by midday in London. The pan-European STOXX 600 index turned flat after rising as much as 0.7%, as a slump in Italy's stock index and European bank stocks weighed.
In oil markets, crude surged after the United States said its navy had destroyed an Iranian drone in the Strait of Hormuz, a major chokepoint for global crude flows, raising concerns about supply disruptions out of the region.
Iran said all its drones had returned safely to base, and there was no sign of a major escalation in the Gulf.
Comments by New York Fed President John Williams on Thursday made it virtually certain, in the markets' view, that the Fed would cut interest rates by at least 25 basis points at its July 30-31 policy meeting and also revived expectations of an even deeper 50 bp reduction.
Financial markets reacted quickly, with Fed fund rate futures at one point pricing in an almost 70% chance of a 50 bp cut. The odds eased to around 40% after the New York Fed said Williams' speech had not been about immediate policy direction.
MSCI's All-Country World Index, which tracks shares in 47 countries, was up 0.3% after earlier peaking at 0.5% up. But it was still on track to break a six-week streak of weekly gains.
E-mini futures for the S&P 500 index were 0.2% higher, indicating a higher opening on Wall Street later in the day.
"Williams’ comments boosted appetite for riskier assets and markets are now looking for signs of the start of a full easing cycle when the Fed meets at the end of the month," said Piotr Matys, emerging markets strategist at Rabobank.
Matys said he believed the Fed would make a precautionary rate cut at the end of this month, but that it would not be the start of a full cycle of cuts.
WILL RATE CUT SUFFICE?
MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.84%, bouncing back from the previous day's losses, while Japan's Nikkei advanced 2%.
Elsewhere in Asia, the Shanghai Composite Index rose 0.8%, Australian stocks added 0.75% and South Korea's KOSPI gained 1.4%.
For the week, the MSCI ex-Japan index climbed a modest 1%, as riskier assets were partly capped by U.S. President Donald Trump's reiteration of his threat to impose further duties on Chinese imports.
The two sides resumed talks recently to seek an end to a year-long trade war that has rattled financial markets and slowed global growth. But most analysts do not expect an agreement any time soon, with some predicting a strong risk of further tariff escalation.
"Although central banks around the world have embarked on policy-easing in a bid to support their respective economies, investors are left to ponder whether the stimulus will be enough to offset the effects from heightened U.S.-China trade tensions," said Han Tan, market analyst at FXTM.
The dollar index against a basket of six major currencies stood about 0.2% higher at 97.016 after losing roughly 0.5% overnight to a two-week low of 96.671 in the wake of the comments from the Fed's Williams.
The euro was 0.34% lower at $1.1237 after climbing 0.45% the previous day.
Oil prices rose on Friday as tensions spiked again in the Middle East after the United States said it had destroyed an Iranian drone in the Strait of Hormuz, a major chokepoint for global crude flows.
West Texas Intermediate crude futures were 81 cents, or 1.44%, higher at $56.11 per barrel after touching $56.36. They ended 2.6% lower in the previous session and were headed for a weekly decline of around 6%.
Spot gold eased over half a percent as investors locked in profits after bullion surpassed $1,450 an ounce for the first time in more than six years on dovish Fed signals and Middle East tension. (Reporting by Ritvik Carvalho; additional reporting by Tom Arnold in London and Shinichi Saoshiro in Tokyo; Editing by Kevin Liffey)