* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Oct 11 (Reuters) - The dollar extended losses and hit its lowest levels in nearly two weeks on Thursday following an overnight drop in U.S. Treasury yields, with investors focused on monthly inflation data to gauge whether the selloff has more room to run.
While concerns of a widening trade war between the United States and its rivals have affected the U.S. currency in the second quarter of the year, growing expectations of more interest rate increases in the coming months have played a leading role in the dollar's 2.5 percent rise since July.
But the overnight drop in U.S. Treasury bond yields pushed the greenback lower, with the dollar index falling 0.4 percent to hit its lowest levels since Oct. 1.
"It is a bit too early to say whether the dollar's rise is coming to an end as it may rally further if yields on ten-year U.S. Treasuries break above the 3.25 percent levels," said Thomas Flury, head of currency strategy at UBS Global Wealth Management's Chief Investment Office in Zurich.
With long dollar positions at their biggest since end-2016 among hedge funds, markets have become focused on any slight tweak in likely policy settings from the U.S. Federal Reserve and any data that might change the central bank's thinking.
U.S. inflation data for September is due later in the day with market expectations of a 0.2 percent rise on a monthly basis. A stronger rate might push 10-year yields higher.
"The dollar's weakness may be due to some unwinding of very long positions ...after the overnight drop in U.S. yields but these are very volatile markets," said Manuel Oliveri, a currency strategist at Credit Agricole in London.
Risk appetite remained broadly robust in currencies, with the Aussie and kiwi dollars rallying by half a percent each against the greenback.
As investors selectively took shelter in safe-haven assets, the MSCI index of global stocks hit its lowest levels since early February while gauges of market volatility jumped.
Yields on 10-year U.S. Treasury debt ticked four basis points lower to 3.18 percent though similar gauges in currency markets such as the Japanese yen and the Swiss franc were broadly steady.
The Swedish crown rallied 1 percent against the euro after robust house price and general inflation data.
The euro edged half a percent higher to $1.1577 on the broad dollar weakness, though widening yield spreads between Italian and safe-haven German debt capped gains. (Reporting by Saikat Chatterjee; editing by John Stonestreet and David Stamp)