NEW YORK (Reuters) - A gauge of global stocks declined after early gains dissipated on Friday as expectations for a strongly dovish U.S. Federal Reserve at its next meeting were dialed back, pushing the dollar higher.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., July 16, 2019. REUTERS/Brendan McDermid

On Wall Street, a climb in major indexes fizzled late in the session after the Wall Street Journal reported the Fed is likely to cut rates by 25 basis points when it meets later this month, after comments by a Fed official on Thursday raised expectations a larger cut may be on the cards.

A rise in Microsoft helped keep major indexes afloat in early trade as quarterly results topped expectations, powered by its cloud business, but the largest U.S. company by market capitalization was unable to sustain most of its gains, ending the session up 0.15%.

“This was a funny day, there has been a lot of chop,” said Dennis Dick, head of markets structure at Bright Trading LLC in Las Vegas.

“This market has been dependent on cheap money and it is going to continue to be dependent on cheap money forever. They won’t even stop digging the hole, to get out of the hole you have to stop digging first.”

Stocks had rallied late on Thursday 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.

Expectations for a rate cut of half a percentage point at the Fed’s July 30-31 meeting are now at 22.5%, according to CME’s FedWatch tool, down from as high as 71% on Thursday. Markets see it as a certainty the Fed will cut rates by at least a quarter of a percentage point at the meeting.

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 fell 68.77 points, or 0.25%, to 27,154.2, the S&P 500 lost 18.5 points, or 0.62%, to 2,976.61 and the Nasdaq Composite dropped 60.75 points, or 0.74%, to 8,146.49.

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 the increasingly unwieldy government might collapse.

The pan-European STOXX 600 index rose 0.12% and MSCI’s gauge of stocks across the globe shed 0.09%. MSCI’s index snapped 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 0.35%, with the euro down 0.49% to $1.122.

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.

Still, WTI dropped 7% this week and Brent lost about 5.5% for the week, the steepest losses for both benchmarks since late May.

U.S. crude settled up 0.6% on Friday at $55.63 per barrel and Brent was last at $62.47, up 0.87% on the day.