By Nigel Stephenson
LONDON (Reuters) - European shares kicked off the new quarter with solid gains as talk of higher interest rates boosted banks, while the dollar rose from nine-month lows as U.S. Treasury yields hit their highest since mid-May.
Wall Street looked set for further gains on Tuesday, with index futures up about 0.3 to 0.4 percent <ESc1> <1YMc1>, after the S&P 500 index had its best first half-year since 2013.
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The pan-European STOXX 600 index <.STOXX>, which suffered its biggest month loss for a year in June on worries over tightening monetary conditions, rose 0.6 percent, led higher by banks <.SX7P> and basic resources firms <.SXPP>.
France's CAC 40 index <.FCHI> rose 1 percent, Spain's IBEX 0.9 percent and Italy's FTSE MIB <.FTMIB> 1.6 percent. Britain's main FTSE 100 index <.FTSE> added 0.4 percent.
Mining group Glencore <GLEN.L> rose 2.8 percent to 295 pence a share after Morgan Stanley raised its target price on the stock to 320 pence.
A number of senior policymakers hinted last week that it may be time to end the era of ultra-loose monetary policy.
Banks, which benefit from higher interest rates, were among the leading gainers. An index of Italian banks <.FTIT8300> gained 2.4 percent, helped by a 6-percent rise in Carige <CRGI.MI> on the day its board meets to discuss capital plans for the regional lender.
Carige, Italy's ninth-biggest bank with assets of 26 billion euros ($29.7 billion), has been told by the European Central Bank it needs to raise capital and get rid of bad loans.
Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> held steady, staying within a stone's throw of a two-year peak hit last week.
Japan's Nikkei <.N225> ticked up 0.1 percent, buoyed by a Bank of Japan survey showing confidence among big manufacturers hit its highest in more than three months in June.
Chinese blue-chip shares <.CSI300> dipped on worries that the world's second-biggest economy could be slowing down.
Hong Kong's Hang Seng index <.HSI> rose 0.1 percent, with financial shares benefiting from the launch on Monday of the "Bond Connect" scheme linking China's $9 trillion bond market with overseas investors.
The dollar index, which measures it against a basket of currencies and fell 1.7 percent last week, gained 0.5 percent as U.S. Treasury yields rose. Ten-year yields hit a high of 2.33 percent <US10YT=RR> and last stood at 2.31 percent, up 1.2 basis points (bps).
The euro, which hit 14-month highs against the dollar last week after European Central Bank President Mario Draghi hinted at tweaks to the bank's bond-buying stimulus program, fell 0.5 percent to $1.1366 <EUR=>.
In anticipation of growing economic strength, euro zone manufacturing activity, as measured by IHS Market's purchasing managers' index for June, hit its highest since April 2011.
The yen <JPY=> fell 0.6 percent to 113.02 to the dollar after Japanese Prime Minister Shinzo Abe's Liberal Democratic Party lost an election in Tokyo on Sunday.
Sterling <GBP=D3> slipped 0.5 percent to $1.3005 after weaker-than-expected manufacturing sector data.
PMI data showed activity fell to 54.3 from a downwardly revised 56.3 in May - a three-month low and below all forecasts in a Reuters poll.
"UK manufacturing fell off the cliff and it clearly shows that economy is not doing well at all," Think Markets analyst Naeem Aslam said.
BUND YIELDS PULL BACK
German 10-year government bond yields <DE10YT=TWEB>, the benchmark for euro zone borrowing costs, pulled back from 3 1/2-month highs hit in the wake of Draghi's comments.
It last stood at 0.45 percent, down 2.4 bps.
"The market reaction last week was very sharp and now is probably the time to digest recent comments," BNP Paribas European rates strategist, Patrick Jacq, said. "July could be a more supportive month for bonds as there is less supply, but clearly the trend is now upwards for yields."
Brent crude oil <LCOc1> rose 11 cents to $48.88 a barrel after a survey on Friday showed U.S. drillers cut the number of rigs in use by two to 756 last week. The total was still more than double the number a year ago.
Gains were limited, however, as a Reuters survey on Friday showed OPEC oil output rose by 280,000 barrels a day to a 2017 high, despite the group having agreed to cut production to help balance the market.
(Additional reporting by Hideyuki Sano in TOKYO, Jemima Kelly and Dhara Ranasinghe in LONDON; Editing by Louise Ireland)