By Nigel Stephenson
LONDON (Reuters) - European shares rose on Monday, led higher by Germany after an upbeat report on factory activity, while the dollar steadied following signs the U.S. economy may be emerging from a recent soft patch.
Euro zone powerhouse Germany's manufacturing sector lost some momentum in April but expanded for a fifth consecutive month. In France, the sector's final PMI showed activity contracting and falling for a 12th successive month.
The Euro Stoxx index of euro zone shares was up 1 percent, retaking some of the ground lost in a decline last Wednesday, when a rising euro hit export-sensitive German stocks.
On Monday, helped by a weaker euro, Germany's DAX index rose 1.3 percent. France's CAC rose 1 percent.
"The German data shows that the manufacturing activity is still expanding and concerns that a recent rise in the euro would hurt German companies are definitely overdone. The German economic growth has been solid and gives support to the stock market," Christian Stocker, strategist at UniCredit, said.
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The positive momentum seemed set to be maintained on Wall Street, with index futures signalling a higher open.
Factory activity in China, the world's second-largest economy, saw its fastest drop in a year in April as new orders shrank, according to HSBC/Markit Purchasing Managers' Index. It fell to 48.9 last month from 49.6 ion March.
However, Chinese shares closed higher as investors saw the data as strengthening the case for fresh stimulus from Beijing.
The CSI 300 index of the largest listed companies in Shanghai and Shenzhen rose 0.8 percent, led by construction companies and utilities.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.2 percent.
Trading on Monday was thinned by holidays. UK markets were closed while Japanese markets were closed from Monday to Wednesday. Major European markets were closed on Friday.
The dollar steadied on Monday, taking heart from a jump on consumer sentiment on Friday and forecast-beating vehicle sales.
The dollar index, which measures the greenback against a basket of currencies and hit a two-month low last week, was up 0.3 percent, though analysts remained cautious.
"We need to see a couple of weeks of good data from the US for the dollar to pick up again and get back on track. If that doesn't materialize then all bets are off. It's too early to say that the correction is over," said Sonja Marten, chief FX strategist at DZ Bank in Frankfurt.
The euro, which has risen recently on higher government bond yields on signs of a pick-up in euro zone inflation, was down 0.6 percent at $1.1138.
The yen was steady at 120.20 per dollar and sterling was down 0.1 percent at $1.5133 three days before Thursday's general election at which no single party is expected to win a majority. One-week sterling/dollar volatility, a measure of how sharp swings may be in the currency, rose to its highest since the last UK parliamentary election, in 2010.
Investors will also keep a close eye on U.S. jobs data on Friday for further clues to the Fed's policy outlook.
GERMAN YIELDS
Yields on benchmark German Bunds, which saw their biggest weekly rise since mid-2013 last week, rose to levels last hit before the European Central Bank began a 1 trillion-euro bond-buying programme in March to boost inflation.
German 10-year yields were up 3.5 basis points to 0.41 percent.
"More and more investors are avoiding negative or very low yielding bonds and more and more think that reflation is actually taking place," said Chris Iggo, CIO for fixed income at AXA Investment Managers.
Renewed prospects of a financing deal to keep Greece afloat and in the euro zone have also been cited as a factor behind the surge in German yields.
Oil prices rose to 2015 highs, supported by expectations a supply glut will ease and of Chinese stimulus. Brent crude was up 59 cents a barrel at $67.03, more than 40 percent higher than the six-year low hit in January.
Gold rose 0.4 percent to $1,180.61 an ounce.
(Additional Jemima Kelly, Atul Prakash and Marius Zaharia; Editing by Larry King)