FOREX-Dollar hits fresh 10-week lows ahead of inflation report

* 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, 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 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 steadied at $0.783, hovering just below a two-month high hit on Monday.

The euro 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 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.

(Reporting by Kate Duguid and Saikat Chatterjee; editing by Jonathan Oatis)