* European stocks touch 16-month high
* Asia stocks, US futures turn flat
* Generally upbeat PMI data supports markets
* Trump-Xi meeting moves into focus
* Investors nervous Trump may take protectionist steps
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh (Updates throughout)
By Dhara Ranasinghe
LONDON, April 3 (Reuters) - World stock markets and the U.S. dollar started the second quarter on a positive note on Monday, although caution also set in as the first meeting between U.S. President Donald Trump and China’s Xi Jinping loomed.
European shares touched a 16-month high, tracking Asian shares up after generally upbeat economic data.
German manufacturing growth reached an reached an almost six-year high in March, Markit’s Purchasing Managers’ Index (PMI) for manufacturing showed on Monday. Manufacturing activity in France and Italy also rose, adding to signs of a pickup in momentum in the global economy.
A private survey on China’s manufacturing on Saturday came in below market expectations but still showed a healthy expansion after a similar survey by the government on Friday pointed to strong growth in the sector.
The Bank of Japan’s “tankan” survey showed that business sentiment improved, albeit slightly less than expected.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.2 percent, while Japan’s Nikkei gained 0.8 percent after hitting a seven-week low on Friday.
U.S. stock futures were flat, indicating a note of caution as focus turned to earnings and a meeting on Thursday and Friday between the U.S. and Chinese presidents.
“Despite the solid gains seen so far this year, there is some evidence that the rally in U.S. markets is looking a little tired given President Trump’s trials and tribulations in Congress,” said Michael Hewson, chief market analyst at CMC Markets.
“The reflation trade is likely to face a new test this week when President Trump entertains the Chinese leader Xi-Jinping at his Mar-a-Lago golf course in Florida, which in the words of President Trump himself could be a little ‘difficult’.”
A failure to push through healthcare reforms last month has added to concerns that Trump may struggle to pass highly anticipated tax cuts and infrastructure spending bills.
Trump held out the possibility on Sunday of using trade as a lever to secure Chinese cooperation against North Korea and suggested Washington might deal with Pyongyang’s nuclear and missile programs on its own if need be.
On Friday, the U.S. president sought to push his crusade for fair trade and more manufacturing jobs back to the top of his agenda by ordering a study into the causes of U.S. trade deficits and a clampdown on import duty evasion.
Any hints that Washington may name some of its trade partners such as China, Japan and Germany as currency manipulators could dent the dollar. The U.S. Treasury will release its next currency report on April 15.
“The meeting between Trump and Xi is very important because if they can form some sort of mutual interest, it will be in their mutual benefit, however, if the differences grows even further, then it spells more problems for the dollar,” said Naeem Aslam, chief market analyst at Think Markets UK.
The dollar index, which measures the dollar’s value against a basket of other major currencies, was up 0.28 percent at 100.63 - above four-month lows hit last week.
U.S. monetary policy also remained in focus with U.S. jobs data due out on Friday, while in Europe April marked the start of a fall in the European Central Bank’s monthly asset purchases to 60 billion euros from 80 billion euros.
Governments and other economic actors need to get ready for higher borrowing costs after years of record lows, ECB Executive Board member Benoit Coeure said on Monday.
The euro was little changed at around $1.06, but 0.4 percent firmer against sterling, which fell after data showed British manufacturing lost momentum last month.
South Africa’s rand was another currency nursing losses. It fell 1.5 percent to two-month lows on worries about a ratings downgrade following last week’s dismissal of respected finance minister Pravin Gordhan. (Additional report by Hideyuki Sano in Tokyo; Editing by Tom Heneghan and Stephen Powell)