LONDON: Global stocks gained for a third straight day on Wednesday, bolstered by investors' growing hopes that the Federal Reserve might cut interest rates this year to boost a slowing global economy, while the dollar languished near seven-week lows.

A flare-up in trade tensions between the United States and China, which busted investors' assumption a deal was on the cards, has hit world stocks and triggered fears of an impending recession.

But recent comments from policymakers have helped stem the tide as top Federal Reserve officials this week began warning that the trade war may force them to respond, prompting investors to price possible interest rate cuts.

Interest rate futures show the U.S. central bank will start cutting rates as soon as next month, with as many as three rate cuts priced by year-end.

Fed Chairman Jerome Powell did not question the market rethink of the U.S. interest rate trajectory on Tuesday.

He dropped his standard reference to the Fed being "patient" in approaching any rate decision and said the central bank was watching fallout from the trade war and would react "as appropriate."

The Fed chairman's comments come a day after St. Louis Federal Reserve President James Bullard said in a speech that a rate cut may be needed "soon".

Stock markets responded positively to Powell's comments, with U.S. stocks registering their biggest one-day gains in five months.

The optimism rolled over into markets on Wednesday, with the MSCI All-Country World Index up 0.4% after the start of European trading, adding further to a 1.4% gain on Tuesday.

"Whilst the markets are giddy on central bank support, the effects could be short-lived," said Jasper Lawler, head of research at London Capital Group.

"Let's not forget the other half of the equation is the escalating trade war on multiple fronts. Today the markets are happy to focus on Fed support, but with the U.S. Commerce Department promising retaliation in the event of China's rare earth's threat, this trade war looks set to get worse before it gets better."

China is willing to meet reasonable demand for rare earths from other countries, but it would be unacceptable that countries using Chinese rare earths to manufacture products would turn around and suppress China, its commerce ministry said last week. China's dominance as a supplier of rare earths could be a vital bargaining chip in the trade war with the U.S.

The International Monetary Fund (IMF) cut its 2019 economic growth forecast for China to 6.2% on heightened uncertainty around trade frictions, saying that more monetary policy easing would be warranted if the Sino-U.S. trade war escalates.

European markets opened flat to marginally higher, but most bourses barring Britain's FTSE 100 registered gains of nearly 0.5% by 0807 GMT. The pan-European STOXX 600 index was up 0.5%.

In bonds, Germany's 10-year bond yield reached a record low and Italian debt held on to this week's gains as investors ramped up their bets on a generous loan package for banks in the euro zone as well as a U.S. rate cut.

Italy's 10-year government bond yield is down 14 basis points this week so far at 2.52%, even though the European Union may start proceedings this week to fine Italy for breaching debt limits.

In currencies, the Fed comments weakened the dollar for a fifth consecutive day, lifting the euro and pushing investors into safe-haven assets including the Japanese yen. The dollar struggled near a seven-week low.

"Given the extent of the dovish re-pricing of the Fed outlook and the collapse in U.S. treasury yields in recent weeks, the dollar losses appear fairly muted in this context," said Chris Turner, head of FX strategy at ING in London.

In commodity markets, oil prices resumed their slide, dragged down by a surprise gain in U.S. inventories and comments from the head of Russian state oil producer Rosneft questioning the point of a deal with OPEC to withhold supplies.

In European trade, U.S. crude retreated 0.85% to $53.03 a barrel and Brent crude futures dropped 0.6% to $61.58 per barrel. - Reuters