GLOBAL MARKETS-Global shares edge up as Fed pause bets bolster sentiment

(Updates prices at 1120 GMT)

By Naomi Rovnick and Kevin Buckland

LONDON/TOKYO June 9 (Reuters) - Global equities were set for a small weekly gain on Friday following a Wall Street rally overnight, as rising bets the Federal Reserve will skip a rate increase next week overshadowed worries about U.S. markets being drained of cash.

MSCI's broad index of global shares edged 0.1% higher, on track for a weekly rise of 0.6%.

Europe's STOXX 600 index fell 0.3%, dragged lower by chemicals stocks after Britain's Croda International issued a weak profit outlook. U.S. stock futures fell 0.1%, indicating some softness after the S&P 500 entered a technical bull market the day before.

Traders now lay 73% odds on the Fed keeping rates steady on June 14, in a range of 5%-5.25%, pausing its most aggressive hiking cycle since the 1980s.

Bets for a pause were supported by data on Thursday that showed the number of Americans filing new jobless claims surged to a more than 1 1/2-year high, indicating a loosening labour market that could further quell inflation.

Investors also hope the Fed will pause its rate rise campaign as a quirk of the U.S. debt ceiling negotiations has posed a potential a threat to market liquidity.

The U.S. government is expected to rush to sell short term debt to replenish its Treasury General Account, potentially at yields so high that banks raise deposit rates to compete for funding, reducing interest in riskier assets like equities.

"We're all worried about liquidity," said Ben Jones, director of macro research at Invesco. The Fed, he added, "still wants to tighten," policy and therefore may allow the TGA rebuild to drain liquidity from markets without stepping in to provide other support tools.

This fear was not dominating trading on Friday, however.

Fed Chair Jerome Powell said on May 19 it was still unclear if U.S. interest rates will need to rise further, and the risks of overtightening or undertightening had become more balanced.

YIELDS UP

Two-year Treasury yields, which are extremely sensitive to monetary policy expectations, rose about 4 basis points (bps) to around 4.56%. The 10-year yield edged up 4 bps to 3.753%.

The U.S. dollar index, which measures the performance of the U.S. currency against six others, rebounded 0.2% to 103.52.

The euro slipped 0.14% to $1.0765, just below Thursday's two-week high of $1.0787.

Elsewhere, the Turkish lira extended its decline to a new record low of 23.54 per dollar, even as President Tayyip Erdogan's appointment of a U.S. banker as central bank chief sent a strong signal for a return to more orthodox policy.

Erdogan had last week put well-regarded former finance minister Mehmet Simsek back in the post. Simsek said this week that the guiding principles for the economy would be transparency, consistency, accountability and predictability.

Leading crypto asset bitcoin briefly dipped before recovering to trade 0.4% firmer at $26,603 after crypto exchange Binance said it was suspending dollar deposits and would soon pause fiat currency withdrawal channels following a U.S. Securities and Exchange Commission crackdown.

Crude oil edged higher but gains were tempered by a report that the United States and Iran were close to a nuclear deal, although denials from both parties kept it off the previous session's lows.

The prospect of a deal, which reportedly included scope for an additional 1 million barrels per day of Iranian supply, initially dented crude prices.

Brent crude futures fell by as much as 0.9% at one point, before reversing course to last trade up 0.3% at $76.20 a barrel. West Texas Intermediate (WTI) crude was up 0.3% at $71.50 a barrel.

(Reporting by Naomi Rovnick and Kevin Buckland; Editing by Gerry Doyle, Andrew Heavens and Chizu Nomiyama)