* MSCI ACWI gains, still set for weekly fall
* Crude choppy after Trump says U.S. Navy destroys Iranian drone
* Dollar recovers as dovish Fed comments walked back (Updates with close of European markets)
By Chuck Mikolajczak
NEW YORK, July 19 (Reuters) - A gauge of global stocks climbed on Friday as investors looked for a strongly dovish U.S. Federal Reserve at its next meeting and as early returns on earnings season have come in better than anticipated.
On Wall Street, a gain of 1.06% in Microsoft helped lift the Dow and kept the S&P 500 and Nasdaq slightly afloat as quarterly results topped expectations, powered by its cloud business.
Stocks received some modest follow-through to the plus side following Thursday's late rally after two influential Federal Reserve officials - New York Fed President John Williams and Fed Board of Governors Vice Chair Richard Clarida - laid out the case for quick action by the central bank to support the U.S. economy.
However, Williams' comments were later walked back, with the New York Fed saying the speech was not about potential action at the upcoming meeting.
That dialed back expectations to about 39% for a rate cut of half a percentage point at the Fed's July 30-31 meeting, according to CME's FedWatch tool. Markets see it as a certainty the Fed will cut rates by at least a quarter of a percentage point at the meeting.
"Microsoft is a sign that not all companies are suffering from the downturn we're seeing in manufacturing or the pressure from interest rates that's affecting financials," said Jeff Kleintop, chief global investment strategist, at Charles Schwab in Boston.
Earnings expectations for the S&P 500 have been trending upward recently and show growth of 1% for the second quarter, according to Refinitiv data. As recently as Tuesday, earnings were expected to show a decline for the quarter.
The Dow Jones Industrial Average rose 85.45 points, or 0.31%, to 27,308.42, the S&P 500 gained 2.13 points, or 0.07%, to 2,997.24 and the Nasdaq Composite added 6.93 points, or 0.08%, to 8,214.18.
European shares closed slightly higher, having given up early gains of as much as 0.7%, as political turmoil weighed on Italian stocks after the country's Deputy Prime Minister Matteo Salvini said he would meet coalition partner and leader of the 5-Star Movement Luigi Di Maio amid speculation that the increasingly unwieldy government might collapse.
The pan-European STOXX 600 index rose 0.12% and MSCI's gauge of stocks across the globe gained 0.33%.
Despite Friday's advance, MSCI's index was poised to snap a six-week streak of gains.
The walk back in the dovish Fed comments helped the dollar recover from declines in the prior session, while the euro weakened as expectations of a rate cut by the European Central Bank as early as next week picked up steam.
The dollar index rose 0.33%, with the euro down 0.46% to $1.1223.
In oil markets, crude advanced but was off earlier highs after climbing roughly 2% amid rising tensions between the United States and Iran after a senior Trump administration official said the U.S. will destroy any Iranian drones that fly too close to its ships.
Prices pulled back, however, with Brent prices on track for their biggest weekly decline of the year and U.S. crude on pace for its biggest weekly drop in two months.
U.S. crude rose 0.81% to $55.75 per barrel and Brent was last at $62.68, up 1.21% on the day.
Additional reporting by Medha Singh and Uday Sampath in Bengaluru; Editing by Dan Grebler and Susan Thomas