GLOBAL MARKETS-Iran-U.S. tensions take the edge off world stocks rally

* Potential military strikes in Middle East worry markets
* World stocks fall but remain up 4% on the week
* Central bank easing still a driver
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

By Abhinav Ramnarayan
LONDON, June 21 (Reuters) - World stocks fell on Friday, as
worries about a threatened U.S. military strike against Iran and
a global trade conflict took the edge off a central bank-induced
rally from earlier in the week.
The New York Times said U.S. President Donald Trump approved
military strikes against Iran on Friday in retaliation for the
downing of an unmanned surveillance drone, then pulled back from
launching the attacks.
Iranian officials told Reuters on Friday that Tehran had
received a message from U.S. President Donald Trump through Oman
warning that a U.S. attack on Iran was imminent. Worries over possible military strikes persist, and the MSCI
world equity index .MIWD00000PUS , which tracks shares in 47
countries, fell from a seven-week high, driven mostly by
weakness in Asian stocks. A rally by European stocks also faded,
though a pan-European index .STOXX was higher on the day.
" ... Market risk hasn't been switched off, it's merely gone
dim," said Stephen Innes, managing partner at Vanguard Markets.
"However, it does appear equity markets are tired and may be
suffering from a bit of a hangover after partying it up to post
FOMC."
A Federal Reserve Open Market Committee meeting this week
opened the door to rate cuts in the United States.
Earlier, MSCI's broadest index of Asia-Pacific shares
outside Japan .MIAPJ0000PUS lost 0.15%. The index was still up
nearly 4% on the week, during which it reached its highest level
since May 8.
The Shanghai Composite Index .SSEC rose 0.5%, Australian
stocks .AXJO declined 0.6% and Japan's Nikkei .N225 shed
0.8%.
The promise of rate cuts from both the Federal Reserve and
the European Central Bank has kept sentiment strong in stock
markets. Wall Street rose to record highs overnight, with the
S&P 500 .SPX gaining nearly a percent.
But tensions remain elevated, and safe-haven gold XAU=
advanced to a six-year high of $1,410.78 an ounce on Friday,
boosted by the geopolitical tensions and the prospect of a U.S.
rate cut. At one stage, gold was up nearly 5% on the week.
GOL/
"While lower real rates in the U.S. and globally make gold
more attractive, the metal is being increasingly viewed as a
cardinal asset to hedge against the scrim of unpredictability
like the fear of recession and war," Innes said.
Meanwhile, China and the United States are set to resume
trade talks before Presidents Donald Trump and Xi Jinping meet
next week in Japan. Hopes of an agreement grew after the two
leaders talked by telephone call, but neither side has signalled
a shift from positions that led to an impasse last month.
The Fed's signal that rate cuts were likely brought some
relief, but also raised the spectre of a global currency war.
On Friday, the dollar .DXY fell against a basket of six
major currencies to a two-week low of 96.495. The index has shed
roughly 1% this week.
The dollar has fallen 1.35% versus the yen JPY= this week,
reaching a six-month low of 107.045 yen on Friday.
In oil markets, U.S. crude oil futures CLc1 were up 0.46%
at $57.33 per barrel. They had surged more than 5% the previous
day after Iran shot down the U.S. drone. O/R