GLOBAL MARKETS-Dollar at 3-year low, stocks extend record run as Fed pressures mount

By Marc Jones

LONDON, June 26 (Reuters) - The dollar sank to a three-year low while world stocks notched their second record high in three days as a report that Donald Trump was planning to choose the next Federal Reserve chief early fuelled fresh bets on U.S. rate cuts.

Dollar selling was ongoing as U.S. trading picked up pace after the Wall Street Journal said the U.S. president - who has been urging the Fed to cut rates faster - was toying with the idea of selecting Chair Jerome Powell's replacement in the next few months ahead of his formal departure next May.

It left the greenback .DXY down nearly 0.5% on Thursday and more than 10% for the year. If it stays that way in the next few days it will be its biggest first half-of-a-year fall since the start of the era of free-floating currencies in the early 1970s.

Wall Street's main markets .SPX, .DJI, .NDX .N opened modestly higher, which kept MSCI's record-high world stocks benchmark .MIWD00000PUS almost 8% ahead for the year.

"The striking thing on the dollar trend of the last six weeks is that in almost any market regime the dollar is struggling to appreciate," State Street's Michael Metcalfe said.

"It seems to be in something of a structural decline," he added, highlighting State Street data that investors were now the most negative they have been on the dollar - or "underweight" in banking-speak - since the COVID pandemic.

Euro traders also took heart from the outcome of Wednesday's NATO summit that saw members of the alliance agree to spend 5% of output on defence - broken down into 3.5% on troops and weapons and 1.5% on looser, defence-related measures.

U.S. President Trump had also announced plans to hold talks with Iran next week to seek a commitment from Tehran on curtailing its nuclear ambitions.

SHADOW MOVES

Overnight in Asia, Tokyo's Nikkei .N225 jumped 1.65% to its highest level since January, while MSCI's index of Asia-Pacific shares outside Japan .MIAPJ0000PUS finished slightly higher too. .N

There are growing expectations that the Fed will soon be cutting rates again following recent patchy U.S. data, but Trump's criticism of it for not moving quickly enough has been escalating too.

He has repeatedly targeted Fed chief Powell, and his idea of naming a successor well before Powell leaves office would effectively create a shadow over the head of the U.S. central bank chief that could undermine him.

"I think it’s a given that Trump's pick to succeed Powell, when it comes, will be one that sits at the highly dovish end of the spectrum and will support Trump's agenda of lowering interest rates," said Tony Sycamore, market analyst at IG.

"The issue with this is (that) it will resurface questions from earlier in the year around the Fed's independence, which, as we saw, undermines confidence in the Fed and the USD."

The dollar index .DXY, which measures the U.S. currency against six peers, now sits at its lowest level since March 2022 following its slide this year.

Markets are also on watch as the clock ticks down to Trump's July 9 deadline for trade deals to be struck, otherwise sharply higher tariffs on imports to the U.S. will kick in.

Traders are now pricing in a nearly 25% chance of the Fed cutting rates in its end-of-July meeting, compared with 12.5% last week, the CME FedWatch tool showed.

The two-year U.S. Treasury yield US2YT=TWEB, which typically moves in step with interest rate expectations, was down 1.5 basis points at 3.74%, its lowest level in seven weeks. Germany's equivalent DE2YT=RR which is a benchmark for Europe, was roughly the same at 1.83%. GVD/EUR

In commodities, oil prices were back on the rise after their sharp slump following the Trump-brokered ceasefire early this week between longtime Middle East foes Israel and Iran.

Brent crude futures LCOc1 rose 0.6% to $68 a barrel, U.S. West Texas Intermediate crude (WTI) CLc1 gained 1% to $65.60 while gold dipped to $3,323 an ounce. O/R.