By Georgi Kantchev

European stock markets were higher in thin holiday trading Monday after data showed the continent's economy ended last year on a high note.

In the first trading session of 2017, the Stoxx Europe 600 was up 0.5%, with Germany's DAX rising 0.8% and the French CAC 40 gaining 0.4%. The U.S. dollar also rose on Monday, extending its rally into the new year. Most other global bourses, including New York and London, are closed for the New Year's holiday.

The eurozone's manufacturing sector gained speed in December, posting its best reading since April 2011, according to a survey of purchasing managers released Monday. Data firm IHS Markit said its Purchasing Managers Index for the eurozone rose to 54.9 in December from 53.7 in the previous month, in line with an earlier flash estimate. A reading above 50.0 indicates an expansion in activity, and a reading below that level a decline.

Later in the week, inflation data in the eurozone for December is expected to rise to 1.1%, a three-year high, according to economists at French bank Société Générale, as rising oil prices have a more decisive impact on prices.

But the big question for Europe in 2017 is whether the continent's fragile economic recovery will be overtaken by populist politics. Anti-euro populist candidates have gained traction last year and will face a test at the polls in this year's elections in France, the Netherlands and Germany.

"Political risks remain elevated this year," said Julian Howard, head of multiasset solutions at GAM. "Europe will grapple with the need for resolution of the Italian banking crisis and elections in key countries France and Germany, not to mention a growing terrorist threat."

Last year, the Stoxx Europe 600 finished 1.2% lower, mostly dragged down by troubles in major European banks. That contrasted with a rally in U.S. markets, with the Dow Jones Industrial Average logging its best performance since 2013 and flirting with the 20,000 milestone, as investors banked on an improving economy.

Investors will be also keeping an eye on developments in China, where a stock-market slide and the weakening yuan early last year sparked a selloff around the globe.

In data released Sunday, China's official manufacturing purchasing managers index fell to 51.4 in December from 51.7 the previous month, indicating the world's second-largest economy continued to expand, though at a slower rate.

"There is still some room for equities on the upside as the global economy improves but the journey will be long and punctuated by pausesand sometimes ugly reversals," Mr. Howard said.

In currencies, the euro weakened 0.4% against the dollar to $1.0480, while The Wall Street Journal Dollar Index, which measures the dollar against a basket of 16 currencies, rose 0.3%.

The rising dollar was one of the top themes for investors last year, with the currency gaining 3.1% in 2016, according to the WSJ Dollar Index. Many analysts expect the greenback's strength to continue this year amid predictions of higher U.S. interest rates and a stronger U.S. economy.

A rising dollar, coupled with unruly politics in the eurozone, could drive both currencies to trade at parity with each other, analysts say. That could be welcome news for the continent's economy, as a weaker euro could make export-driven economies such as Germany more competitive abroad.

For emerging markets, however, a rising greenback spells trouble as local companies and governments that have borrowed heavily in the U.S. currency would find their debt more difficult to service.

Shares in Asian markets were mostly down Monday. South Korea's Kospi finished down slightly by 0.01% at 2,026.16, while India's S&P BSE Sensex lost 0.1% at 26,595.45. Most other markets in Asia, including China, Japan, Hong Kong and Singapore, were closed. Major commodities markets, including oil and copper, were also closed Monday.

Write to Georgi Kantchev at georgi.kantchev@wsj.com

(END) Dow Jones Newswires

January 02, 2017 07:38 ET (12:38 GMT)

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