LONDON (Reuters) - The dollar sank to a three-year low while world stocks notched their second record high in three days on Thursday as a report that Donald Trump was planning to choose the next Federal Reserve chief early fuelled fresh bets on U.S. rate cuts.

Dollar selling continued after the Wall Street Journal said the U.S. president - who has been urging the Fed to cut rates faster - was toying with the idea of selecting Chair Jerome Powell's replacement in the next few months ahead of his formal departure in May next year.

It left the greenback down more than 10% for the year. If it stays that way in the coming days it will be its biggest first half of a year fall since the early 1970s - effectively the era of free-floating currencies.

European shares edged higher again, buoyed by signs that the Israel-Iran ceasefire appeared to be holding and that European Union leaders were preparing to set their stance for U.S. trade tariff talks ahead of a Trump-imposed deadline of July 9.

The region's flagship STOXX 600 index was up 0.2% on the day while MSCI's record-high world stocks benchmark was up 0.4%, leaving it almost 8% ahead for the year. The euro jumped 0.6% to $1.173, its strongest since 2021.

"The striking thing on the dollar trend of the last six weeks is that in almost any market regime the dollar is struggling to appreciate," State Street's Michael Metcalfe said.

"It seems to be in something of structural decline," he added, highlighting State Street data that investors were now the most negative they have been on the dollar - or "underweight" in banking speak - since the COVID pandemic.

Euro traders also took heart from the outcome of Wednesday's NATO summit that saw the bloc's members of the alliance agree to spend 5% of output on defence - broken down into 3.5% on troops and weapons and 1.5% on looser, defence-related measures.

Overnight in Asia, Tokyo's Nikkei jumped 1.65% to its highest level since January, while MSCI's broadest index of Asia-Pacific shares outside Japan finished slightly higher too. [.N]

Back in currency markets, the Swiss franc firmed to a decade-high while the Japanese yen also strengthened again to below 144 per dollar. 

There are growing expectations that the Fed will soon be cutting U.S. rates again following recent patchy data, but Trump's criticism of it for not moving quick enough has been escalating too.

He has repeatedly targeted Fed chief Powell, and his idea of naming a successor well before Powell leaves office would effectively create a shadow over the head of the U.S. central bank that could undermine him.

"I think it's a given that Trump's pick to succeed Powell, when it comes, will be one that sits at the highly dovish end of the spectrum and will support Trump's agenda of lowering interest rates," said Tony Sycamore, market analyst at IG. 

"The issue with this is (that) it will resurface questions from earlier in the year around the Fed's independence, which, as we saw, undermines confidence in the Fed and the USD." 

The dollar index, which measures the U.S. currency against six rivals, now sits at its lowest level since March 2022 following its slide this year.

Markets are also on watch as the clock ticks down to Trump's July 9 deadline for trade deals to be struck, otherwise sharply higher tariffs on imports to the U.S. will kick in.     

Traders are now pricing in a nearly 25% chance of the Fed cutting rates in its end of July meeting compared to 12.5% last week, the CME FedWatch tool showed.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.5 basis points at 3.764%, its lowest level in seven weeks.

In commodities, oil prices rose on Thursday after their sharp slump following the Trump-brokered ceasefire early this week between longtime Middle East foes Israel and Iran. 

Brent crude futures rose 0.37% to $67.93 a barrel, while U.S. West Texas Intermediate crude (WTI) gained 0.45% to $65.21. [O/R].

(Additional reporting by Ankur Banerjee in Singapore; editing by Mark Heinrich)