LONDON - European stocks rose to a new all-time high on Tuesday and the dollar held firm, as traders reduced their expectations for U.S. Federal Reserve rate cuts and waited for euro zone inflation data to give clues about the European Central Bank's path.

Data on Monday showed U.S. manufacturing grew for the first time in 1-1/2 years in March as production rebounded sharply and new orders increased, highlighting the strength of the economy and raising doubts about whether the Fed could actually deliver the three interest rate cuts outlined in its latest forecast. By contrast, euro zone manufacturing activity contracted at an even steeper pace in March than in February, as demand continued to fall, data on Tuesday showed.

Still, European stocks rose in early trading on Tuesday, starting the second quarter on a positive note as financial markets re-opened after Easter public holidays.

The pan-European STOXX 600 index was up 0.2% at 0901 GMT, having hit a new all-time high earlier in the session. London's FTSE 100 index was up 0.3%, but Germany's DAX slipped 0.1%.

Big European stocks had surged during the first quarter of the year.

"That broad upbeat mood which lifted stocks quite impressively across the first quarter seems to be sticking around as we kick off the second quarter," said Fiona Cincotta, senior markets analyst at City Index.

"The focus is going to be today on German inflation which provides a little bit more clarity over the ECB’s next move."

German consumer price data is due at 1200 GMT and broader euro zone inflation data is due on Wednesday.

Monday's U.S. manufacturing data sent yields on U.S. Treasuries higher and they remained elevated in early European trading, with the benchmark U.S. 10-year yield at 4.3212%, compared to the previous session's two-week high of 4.337% .

The elevated yields lifted the dollar to its highest in almost five months on Monday. On Tuesday the dollar index was steady at 105 and the euro was down 0.1% at $1.073475 .

Euro zone government bond yields also followed Treasury yields higher. Germany's 10-year yield was up around 6 basis points at 2.356%.

The yen was steady against the dollar at 151.625. Traders are watching for any signs of intervention from Japanese authorities, after it touched a 34-year low of 151.975 last week.

"The continued run of robust U.S. data is making the lives of Japanese currency officials attempting to support the yen increasingly uncomfortable," said Tony Sycamore, market analyst at IG.

"It also means that a smoothing event (physical intervention) is unlikely to occur until after the 152.00 level breaks."

Tokyo intervened in the currency market in 2022, first in September and again in October, as the yen slid toward 152 to the dollar, a level last seen in 1990.

Japanese Finance Minister Shunichi Suzuki said on Tuesday that authorities were ready to take appropriate action against excessive currency market volatility.

Oil prices rose, helped by signs that demand from China and the United States could improve.

In the Middle East, an Israeli strike on Iran's embassy in Syria killed seven military advisors, among them three senior commanders, marking an escalation in the war in Gaza between Israel and Hamas, which is supported by Iran. Analysts said Iran's involvement could impact oil supply.

Brent crude futures were up 1.46% at $88.70 a barrel while U.S. West Texas Intermediate crude futures were up 1.55% at $85.01 a barrel.

Spot gold rose 0.5% to $2,260.72 an ounce, after hitting an all-time high of $2,265.49 on Monday.

(Reporting by Elizabeth Howcroft in London, additional reporting by Ankur Banerjee in Singapore; Editing by Emelia Sithole-Matarise)