* MSCI world equity index up 0.25 percent at 317.57
* Fed meeting, mid-term US elections keep investors cautious
* Dollar falls broadly, oil higher
By Natsuko Waki
LONDON, Nov 2 (Reuters) - World stocks rose towards last week's two-year high on Tuesday while the dollar fell broadly as expected monetary easing from the Federal Reserve and a recent upturn in global economic data underpinned risk appetite.
The Australian dollar hit its highest level against the dollar since 1983 after Australia surprised with an interest rate hike just before the Fed began a two-day meeting.
The U.S. central bank is expected to announce a large-scale asset purchases on Wednesday to spur economic recovery, with dealers expecting asset buying of up to $100 billion per month under a quantitative easing programme.
The size of the programme is key as a bigger than expected asset buying -- or money printing -- will weigh on the dollar and boost commodity prices, while smaller buying would hit investor risk appetite.
"The main story is what the Fed will do tomorrow and what it will do to the dollar," Commerzbank commodities analyst Carsten Fritsch said.
"The risk is that the markets are disappointed in the scale of QE2, that it is less than some people are expecting."
The MSCI world equity index rose a quarter of one percent, and the Thomson Reuters global stock index gained 0.9 percent.
Positive economic data on Monday also underpinned investor morale. U.S. factory activity in October expanded and construction spending rose unexpectedly in September while manufacturing in China expanded at the fastest pace in six months in October.
The FTSEurofirst 300 index was up 0.4 percent while emerging stocks rose 0.2 percent.
U.S. crude oil gained 0.5 percent to $83.33 a barrel.
Bund futures rose 64 ticks. The spread investors pay to hold the Irish 10-year government bonds rather than German benchmarks hit a new high around 486 basis points as investors remained concerned about peripheral euro zone debt.
The dollar fell 0.3 percent against a basket of major currencies.
Earlier, the Reserve Bank of Australia raised its cash rate by 25 basis points to 4.75 percent as a pre-emptive strike against inflation, sending the Aussie above parity to $1.0013, its highest since the currency was floated in 1983.
"We're entering uncharted territory, but the Aussie has staying power up here," said Carl Hammer, chief currency strategist at SEB in Stockholm.
"We see it trade above parity in the mid term, as there's also the issue of general dollar selling."
Investors are reluctant to take huge positions, with Tuesday's U.S. mid-term elections also a factor. A Reuters/Ipsos poll found on Monday Republicans will take control of the U.S. House of Representatives from President Barack Obama's Democrats.
Republicans are poised to gain at least 50 seats in the House and take control of the chamber but are unlikely to take the Senate, polls indicate.
(Editing by John Stonestreet)