World stocks and dollar take breather

LONDON (Reuters) - World stocks edged higher from 1-1/2 month lows on Tuesday while the dollar stabilized near record lows as investors paused to assess the impact of expected U.S. interest rate cuts next week on battered financial markets.

Money markets remained tight as renewed concerns about the credit crisis and the health of banks and hedge funds push up the cost of funds, while gold and oil eased after rallying to all-time high in recent sessions.

The Federal Reserve is expected to cut interest rates by a 3/4 percentage point to 2.25 percent next week.

Along with Friday's measures to inject $200 billion of liquidity to ease money market strains, expectations for Fed action have given temporary relief to investors after a sell-off in risky assets over the past week.

"The market has stabilized a little bit but it's fairly temporary as there's nothing really positive out there. We're seeing consolidation after some big moves over short periods of time," said Derek Halpenny, senior currency economist BTM-UFJ.

The FTSEurofirst 300 index .FTEU3 was up slightly on the day, while MSCI main world equity index .MIWD00000PUS was up 0.1 percent after hitting its weakest since mid-January earlier.

Emerging sovereign spreads tightened to 300 basis points while emerging stocks .MSCIEF were up 0.4 percent.

The iTraxx Crossover index, which gauges the cost of corporate bond insurance in Europe, was steady at 632 basis points -- near recent record levels.

FRAGILE SENTIMENT

The dollar .DXY was steady on the day at 72.933 against a basket of six major currencies.

The U.S. currency has come under pressure in recent sessions as weak domestic data cemented expectations of Fed rate cuts.

Interest rate futures are pricing in a chance that the Fed would lower the cost of borrowing to as low as 1.75 percent later this year, from 3.0 percent now.

"To the extent that the policy measures are being inspired by concerns that banks have insufficient capital then it seems unlikely that the U.S. dollar would be out of the woods by any stretch of the imagination and surely risk appetite will remain fragile," UBS said in a note to clients.

The June Bund future fell 10 ticks, while the June Japanese Government Bond future hit a 2-1/2 year high before easing later.

U.S. light crude was down 0.1 percent after rising to all-time highs above $108 a barrel on Monday. Gold fell in tandem to $973.40 an ounce.

(Additional reporting by Veronica Brown, editing by Mike Peacock)