* European shares climb 1.2 percent as risk appetite returns
* 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 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 as stock and commodity markets
showed signs that they might be able to manage another U.S.
interest rate hike in the coming months.
With risk appetite gradually returning after bumpy few days,
European shares .FTEU3 opened up 1.2 percent .EU and
sterling GBP=D4 topped the leaderboard of weekly currency
winners on fading Brexit bets.
The share gains were helped by a 5 percent jump for Italy's
biggest bank UniCredit CRDI.MI. on reports it plans to sell
parts of its business to improve its finances and as commodity
stocks cheered higher oil and metals prices. US/
The dollar, a dominant force in markets this week, was
keeping close to two-month highs after it had passed $1.12 per
euro EUR= and 110 yen JPY= for the first time since March,
buoyed by a jump in U.S. bond 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 Britain's pound, despite a dip on the day,
was on course for its strongest week against the euro since last
October. EURGBP=GBP=
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.
New York Federal Reserve President William Dudley, a
permanent voting member of the central bank's rate-setting
committee, said there was a strong sense among Fed officials
that markets were underestimating the probability of U.S. rate
hikes.
Dudley said he was "quite pleased" investors had apparently
increased bets that a rate hike would come soon.
Markets are 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 U.S. rate hike and
potentially higher dollar, prompted some investors to take
profits after recent gains. O/R
U.S. crude CLc1 added 1 percent to $48.64 a barrel, up 5.3
percent for the week, while Brent crude LCON6 looked to be
gunning for $50 again as it advanced to $49.20, up nearly 2.8
percent for the week.
The dollar's gains weighed heavily on gold, meanwhile,
setting the precious metal on track for its biggest weekly
decline in eight weeks.
Spot gold XAU= 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. MET/
Emerging market stocks .MSCIEF were also feeling the
pressure as they managed only a minor 0.5 percent rebound after
a fourth straight week of losses.
MSCI's broadest index of Asia-Pacific shares outside Japan
.MIAPJ0000PUS ended pretty much flat on the week having seen
currencies there largely bow to the dollar. EMRG/FRX
Japan's Nikkei .N225 recovered from an early stumble to
end the day up 0.5 percent and 2 percent on the week. Chinese
shares .CSI300 were down for a fourth week though on nagging
concerns about its economic health.