* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E
(New throughout)
By Kate Duguid
NEW YORK, May 11 (Reuters) - The U.S. dollar dropped to a
fresh 2-1/2-month low on Tuesday as investors bet that rising
inflation could erode the currency's value, ahead of Wednesday's
release of closely watched consumer price data.
In recent years, rising inflation expectations have helped
the dollar because investors have assumed interest rates would
be increased in response to higher prices. That is no longer the
case.
A disappointing employment report last week triggered a
widespread sell-off in the greenback, and though surging
commodity prices have raised concerns of higher inflation in
coming months, markets believe the U.S. Federal Reserve will
keep rates low and continue purchasing assets.
"Even if we see a print above expectations tomorrow, the
likelihood of a robust dollar rally is very much lessened by the
fact that far fewer market participants expect the Fed to react
to that number in any way," said Karl Schamotta, chief market
strategist at Cambridge Global Payments.
"We're seeing this drumbeat of concern about inflation
spreading out across the financial markets."
Appearances on Tuesday by U.S. Fed members John Williams and
Lael Brainard will be parsed for clues as to central bank
thinking.
Against a basket of its major rivals =USD , the dollar
dropped as low as 89.979, its lowest since Feb. 25, and was last
down 0.16% at 90.093.
Resource-oriented currencies, including the Canadian dollar,
consolidated gains as a rally in commodity prices boosted their
appeal.
The Canadian currency CAD=D3 hit a fresh four-year high on
Tuesday, and has stabilized near that level in New York trade,
last roughly flat on the day at C$1.211.
"The economy is performing quite strongly, so that is
supporting expectations for the Bank of Canada to hike ahead of
the Fed," Schamotta said. "Friday's (U.S.) employment data
helped entrench the interest-rate differential between the two
currencies, so that's lifting it. But the biggest impact by far
is the rise in base metal prices."
The Australian dollar AUD=D3 steadied at $0.783, hovering
just below a two-month high hit on Monday.
The euro EUR=EBS rose on Tuesday, having earlier in the
day hit a 2-1/2-month high after data showed German investor
sentiment surged to its highest level in May since the start of
the COVID-19 pandemic. It was last up 0.31% at $1.217.
In cryptocurrencies, ether ETH=BTSP dipped from record
levels hit yesterday, but was nevertheless up 1.46% on the day
to $4,008.02. The second-biggest digital token has rallied 44%
so far in May.
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