(Updates prices)
* Fed chief Powell to deliver second part of testimony
* World stocks weaker on first day of March
* But dollar firm at six-week highs
* U.S./German two-year bond yield gap widest since 1997
* Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh
By Dhara Ranasinghe
LONDON, March 1 (Reuters) - World stock markets enteredMarch on shaky ground on Thursday, falling for the thirdstraight day before the second leg of U.S. Federal Reserve chiefJerome Powell's testimony to lawmakers.
The testimony, due at 1500 GMT, will come two days after hishawkish comments ignited fears the Fed could deliver four U.S.rate rises this year instead of the three already priced in,triggering an equity sell-off and pushing up bond yields.
The U.S. dollar rose to six-week highs against a basket ofcurrencies .DXY while the gap between short-dated U.S. US2YT=RR and German bond yields DE2YT=RR was at its widestsince 1997.
MSCI's all-country equity benchmark fell 0.4 percent aftersnapping a record 15-month long winning streak in February,while European stocks lost 1 percent .STOXX .
Emerging Asian and Japanese shares .MIAPJ0000PUS also fellearlier, with the latter down 1.6 percent .N225 .
Wall Street looked set for another weak open, futuressignalled ESc1 , after it ended February with its worst monthlyperformance in two years.
Chinese shares bucked the trend, however, edging up after aprivate survey showed manufacturing sector growth picking up toa six-month high. Shanghai shares .SSEC closed 0.4 percenthigher. chief Powell will deliver the second leg of hissemi-annual testimony on Thursday, an opportunity to clarifycomments made on Tuesday that rekindled speculation over U.S.monetary tightening this year happening faster than expected.
Powell on Tuesday vowed to prevent the economy fromoverheating while sticking with a plan to gradually raiseinterest rates. equity markets, the fear is that a pick-up in the paceof rate rises could crimp corporate activity and cool economicgrowth. Shaw, chief economist at Investec in London saidPowell's testimony was unlikely to change from the one hedelivered on Tuesday, putting the focus on the question andanswer session.
"He (Powell) appears to have got an easy ride from lawmakersin the sense that the technical questioning on Tuesday wasn'ttoo heavy," Shaw said. "He may not have such an easy time todaywith the Senate Banking Committee."
DOLLAR COMEBACK
The dollar meanwhile has taken heart from the Fed chair'scomments. The dollar index .DXY rose to 90.818, a six-weekhigh.
It has clawed back from the three-year trough of 88.253 setin mid-February, as fears of a ballooning U.S. budget deficitand worries of a possible weak-dollar policy from Washingtontook a toll.
The gap between short-dated borrowing costs in the UnitedStates and Germany was at its widest in over 20 years as themonetary policy outlooks for the two regions diverge.
The U.S./Germany two-year bond yield spread widened to 281basis points. contrast to rising rate-hike speculation in the UnitedStates, data on Wednesday showing euro zone inflation slowed toa 14-month low in February highlighted that a rate rise from theEuropean Central Bank remains some way off. the U.S. we have at least three rate hikes this year,but in the euro zone, there was some exaggeration about wherethe inflation was heading so that is now being priced out andyields are moving to the downside," said DZ Bank strategistDaniel Lenz.
That divergence in rate outlooks also weighed on the euro,which hovered at a six-week low at around $1.2173 EUR= .
The dollar was little changed at 106.69 yen JPY= , havingslipped from the week's peak of 107.680 as broader risk aversionfavoured its Japanese peer.
The Australian dollar was down 0.4 percent at $0.7730 afterbrushing $0.7710 AUD=D4 , its lowest since late December.
Oil fell for a third day on Thursday, trading further below$65 a barrel as rising U.S. inventories, record output and astronger dollar outweighed high OPEC compliance with itssupply-cutting deal.
Brent crude LCOc1 , the global benchmark, was down 0.98percent at $64.10, while U.S. crude CLc1 was down 0.8 percentat $61.14.
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http://reut.rs/2CPDYaNWorld FX rates in 2018
http://tmsnrt.rs/2egbfVh
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