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LONDON  - The euro rose on Tuesday, hovering just below a 2-1/2 month high hit in the previous session, after data showed German investor sentiment surged to its highest level in May since the start of the COVID-19 pandemic.

The ZEW economic research institute said its survey of investors' economic sentiment rose to 84.4 points from 70.7 the prior month. The last time it hit a higher level was in February 2000. A Reuters poll had forecast a rise to 72.0.

"Investors are clearly on a more optimistic mood thanks to the improved pace of vaccinations in Germany and the rest of the eurozone," Scotiabank strategists said in a note.

The single currency climbed 0.35% to $1.2170, holding just below a Feb. 26 high of $1.2179 hit on Monday. It has gained 4% from a five-month low at the end of March.

The euro's gains were also bolstered by widespread dollar weakness as investors waited for comments on U.S. policymaker thinking ahead of inflation data on Wednesday.

Appearances later on Tuesday from U.S. Federal Reserve members John Williams, at 1430 GMT, and Lael Brainard, at 1600 GMT, will be parsed for clues as to central bank thinking.

A disappointing employment report last week triggered a widespread selloff in the greenback and though surging commodity prices have raised concerns of higher inflation in the coming months, markets believe the Fed will remain on hold.

“There is a sense that the Fed has nailed its colours to the mast in terms of allowing the U.S. employment market to dictate monetary policy settings going forward, and with this stance expected to see Fed policy remain ultra-loose for an extended period,” said Stuart Cole, head macro economist at Equiti Capital.

Resource-oriented currencies including the Canadian dollar and the Aussie consolidated gains as a rally in commodity prices boosted their appeal.

The Australian dollar steadied at $0.7827, hovering just below a two-month high hit on Monday. The Canadian currency stabilised near a near four-year high, while the New Zealand dollar perched comfortably at February highs.

Against a basket of its major rivals, the dollar steadied at 90.283, just above a Feb. 25 low of 90.03 hit in the previous session.

"The big question is whether the Fed can be comfortable staying dovish," said Bank of Singapore currency analyst Moh Siong Sim. "If inflation rises more than the Fed expects... what happens to the Fed then?"

Markets expect U.S. year-on-year inflation to hit 3.6% in April, juiced by the base effect of a pandemic year contraction.

Investors seem increasingly at odds with policymakers over whether that sort of price growth will persist, and drove up U.S. five-year breakevens - a measure of inflation expectations - to a decade-high 2.717% on Monday. [US/]