* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
* Stocks set for third straight day of gains
* MSCI ACWI on course for first monthly loss since Oct ‘16
* Dollar index down 0.1 pct
* Eyes on Fed Chair Powell’s first congressional testimony
By Ritvik Carvalho
LONDON, Feb 27 (Reuters) - World stocks held near three-week highs on Tuesday, helped by a decline in borrowing costs ahead of Federal Reserve Chairman Jerome Powell’s first testimony before the United States Congress later in the day.
The MSCI All-Country World Index, was up 0.1 percent by afternoon trade in Europe. Although it has recovered two-thirds of its losses from a selloff earlier this month, the index is set to break a 15-month streak of gains since Donald Trump won the U.S. elections in November 2016. This month’s decline will be its worst since January 2016.
After gains in opening deals, European shares turned red, with the pan-European STOXX 600 down 0.3 percent. Britain’s FTSE 100 advanced 0.1 percent.
Japan’s Nikkei rose 1.1 percent to three-week highs while MSCI’s broadest index of Asia-Pacific shares outside Japan also hit a three-week high before giving up gains on profit-taking in Chinese shares.
Wall Street was set for a lower open, although falling U.S. bond yields helped the S&P 500 advance 1.18 percent on Monday.
The 10-year U.S. Treasuries yield eased to 2.8715 percent, dropping further from its four-year peak of 2.957 percent touched on Feb. 21, driven by month-end buying as well as position adjustments ahead of Powell’s testimony.
Powell’s debut appearance is seen as critical for financial markets at a time when many investors are nervous about the Fed’s policy normalisation following years of stimulus in the wake of the financial crisis almost a decade ago.
Many investors expect the Fed to raise interest rates three times this year, with some pundits predicting four, if U.S. inflation starts to take off, especially as growth is set to get another boost from the Trump administration’s tax cuts and spending plans.
Yet there are worries that higher dollar bond yields could prompt investors to shift funds to bonds from riskier assets, especially when the valuation of the world’s stocks are quite expensive even after their sell-off earlier this month.
The two-year U.S. Treasuries yield was 2.2219 percent, well above the dividend yield of the S&P 500, which stood at 1.88 percent.
“The consensus view in the market is that Powell will continue with a gradualist stance and deliver an upbeat view of US economic prospects,” said Neil MacKinnon, economist at VTB Capital Research.
“The markets are already pricing in three 25 basis points rate hikes, with the first hike expected to be announced at the 20-21 March FOMC meeting. Investors are alert to the possibility of a fourth hike this year, though if Powell emphasises the likelihood of this then markets might react negatively.”
Fed funds rate futures were almost fully pricing in a rate hike at the Fed’s next policy meeting on March 20-21.
Any talk of ‘overheating’ or risks of an ‘inflation overshoot’ could result in the money markets revising up estimates of where the terminal fed funds rate might end up in this cycle, MacKinnon said.
A rise in dollar interest rates could also bode ill for potential borrowers, including U.S. home buyers and many companies that have expanded borrowing for years to take advantage of low dollar funding costs.
Against a basket of currencies, the dollar traded 0.1 percent higher.
Elsewhere in currencies, the euro was flat at $1.2317, off its three-year high of $1.2556 hit earlier this month.
Oil edged lower ahead of weekly data that is forecast to show a rise in U.S. crude inventories, although investor faith in OPEC’s ability to curtail production helped stem a larger price slide.
U.S. West Texas Intermediate futures fetched $63.65, down 0.4 percent, after hitting a three-week high of $64.24 the previous day.
London Brent crude traded 0.3 percent lower at $67.34 a barrel, after hitting a three-week high of $67.90 the previous day.
Reporting by Ritvik Carvalho; additional reporting by Jemima Kelly and Sujata Rao in LONDON and Hideyuki Sano in TOKYO; Editing by Raissa Kasolowsky, William Maclean