* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
* FTSE hits all time high to lead European stocks
* Oil jumps over 2 percent as rally resumes
* Germany, French inflation lifts euro zone bond yields
By Marc Jones
LONDON, Jan 3 (Reuters) - The dollar notched up its biggest gain in three weeks, oil jumped to a 18-month high and a record FTSE lifted European stocks to a one-year peak on Tuesday, building on upbeat Chinese data to ensure a strong start to 2017 for global markets.
Metal prices and bond yields also advanced, as the fastest factory output growth in China in almost six years, the best in Britain in 2-1/2 years and firmer German and French inflation provided confidence for the new year.
Britain's FTSE 100 wasted no time on its first day of trade in 2017 as it hit a record high of 7,200 points while Wall Street, where the Dow Jones is still eyeing 20,000 points, was also pointing to a higher open.
Oil was up 2.2 percent and with U.S. and European bond yields also rising, all the signals pointed to the "reflation" trade that dominated the latter stages of 2016 being firmly back on.
The dollar obliged, racking up its best gain - 1.2 percent - since Dec. 15 against other top world currencies to leave it just shy of a 14-year high.
"If you look at the state of the economy globally, things are in pretty good shape," ABN Amro's Chief Investment Officer Didier Duret said.
"It is not only a Trump rally, it is a cyclical rally," he added, referring to the way markets took off after November's U.S. election. "We still believe the dollar will continue its rise and the euro will weaken, which can provide substantial impetus for European earnings."
Italian banks were also back amongst Europe's top risers as newly merged Banco BPM jumped 8 percent on its second day of trading.
Commodity-linked stocks were hot as they cheered the Chinese data and the rise in oil and metals prices, while European government bond yields headed north as German inflation hit a 3-year high.
Long-term inflation expectations in the 19 country euro zone, measured by the five-year, five-year forward rate , are now at their highest in more than a year and close to the ECB's near 2 percent target, as it prepares to pare back the pace of its mass money-printing scheme.
"Until just a few weeks ago, the general consensus was that upside inflation risks (in Europe) were very limited," said DZ Bank strategist Birgit Figge, pointing to the "significant uplift" that now looked possible.
Oil prices were up more than 2 percent ahead of U.S. trading as the China data fed a market already buoyed by hopes a deal late last year between the top oil producing nations will tighten global supply glut.
Crude was the world's best-performing major asset class in 2016, with a gain of around 50 percent and global benchmarks Brent and U.S. WTI were last at just over $58 a barrel and just under $55 a barrel respectively.
"Markets will be looking for anecdotal evidence for production cuts," Ric Spooner, chief market analyst at CMC Markets, said.
"The most likely scenario is OPEC and non-OPEC member countries will be committed to the deal, especially in early stages."
The oil surge was expected to help Wall Street when it reopens, while data on tap includes the ISM Manufacturing Purchasing Manufacturer's index (PMI) which is expected to have edged up to 53.6 in December.
Back in Europe, the pick up in Germany and French inflation had come on the heels of data on Monday showing manufacturers ramped up activity at the fastest pace in more than five years in December.
The positive numbers failed to shake the euro out of its doldrums, however, with the common currency down 0.7 percent at $1.0384 as gold also sagged.
Overnight in Asia, MSCI's broadest index of Asia-Pacific shares rose 0.6 percent as most regional markets reopened after the New Year holiday although Japan's Nikkei was still closed.
Australian shares were the best performers, closing up 1.2 percent. The Aussie dollar also gained, while in China, both the CSI 300 index and the Shanghai Composite climbed 1 percent having lost over 11 percent last year.
Investors were also keeping an eye on the Chinese yuan after the central bank nearly doubled the number of currencies in a basket used to set the renminbi's value to 24 from 13, including the Korean won, the South African rand and Mexican peso.
Regulators also said they were stepping up scrutiny of individuals' currency purchases and would strengthen punishment for illegal outflows, although the $50,000 annual individual quota will remain unchanged..
"A year ago, the Chinese markets kept everyone on their toes," said Jingyi Pan, market strategist at IG in Singapore, said referring to market turmoil that engulfed investors.
"I don't think that we will see a repeat given that the global economy has a better foothold,"
For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
MSCI world equity index, which tracks shares in 46 countries,
MSCI's main European Index
European stocks or the broader Euro STOXX 600
U.S. crude oil, Brent crude futures
German Bund futures
The dollar against a basket of six major currencies, (weighted geometric mean of the dollar's value compared with 6 other major currencies which are: the euro at 57.6 percent weight, Japanese yen 13.6 percent, Pound sterling 11.9 percent, Canadian dollar 9.1 percent weight, Swedish krona 4.2 percent and Swiss franc 3.6 percent. (Additional reporting by John Geddie and Christopher Johnson in London; Editing by Alison Williams)