(Corrects analyst's bank affiliation in paragraph 5)
* Thin Treasury yields seen as drag on dollar
* Traders look beyond worse than forecast GDP data
* Aussie jumps on brighter business-spending outlook
NEW YORK, May 29 (Reuters) - The dollar eased on Thursday and finished down against other major currencies as traders shrugged off government data showing America's economy shrank at a 1 percent annual rate during the first quarter.
"The movement today mostly reflects the decline in Treasury yields," said David Gilmore, partner at Foreign Exchange Analytics in Essex, Connecticut. "Yields are down today."
Benchmark 10-year Treasuries yields last traded at 2.4402 percent, down about 3 basis points from late Wednesday, after touching 2.402 percent, the lowest since last June.
Unexpectedly low U.S. bond yields, and a receding prospect the Federal Reserve will soon begin raising U.S. rates, diminish demand for dollars, even though the U.S. economy is widely seen as improving, according to many analysts and traders.
"The problem with the dollar is the problem with the bond market," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. "We are being held back by rates that everyone expected to be 3 percent (on 10-year debt) that are now around 2.5 percent."
The dollar, which had given back many of its gains on Wednesday against the euro and the British pound, reclaimed some of the day's losses during overseas trading after the U.S. government reported the first quarterly contraction of the U.S. economy in three years.
The U.S. dollar index, composed of six currency pairs, was off 0.08 percent in late afternoon trading after being down 0.17 percent ahead of the GDP report, which was issued simultaneously with Labor Department data showing fewer claims for unemployment benefits.
Foreign exchange traders focused on signs U.S. economic activity was emerging from the chilling effects of North America's harsh winter.
"Once you get beyond the headline number, and look under the hood, things don't really look so bad," Schlossberg said. "Inventories were to blame for a lot of it, and that bodes well for the future."
The euro, which touched a three-month low under $1.36 this week as expectations solidified for a multi-pronged attack on monetary policy by the European Central Bank next week, stood at $1.3601 in late New York trading for a gain against the dollar of 0.09 percent. Just before the GDP report, the euro was up 0.2 percent.
The British pound increased 0.04 percent against the dollar.
In other trading, the Australian dollar jumped more than half a percent on data showing business investment spending plans for 2014/15 have jumped to A$137 billion from an earlier estimate of A$125 billion.
"The interesting thing about the Australian economy is that it is showing some signs of divergence away from China," said Christian Lawrence, a currency strategist at Rabobank in London.
"There is an increasing feeling that Australia can weather the slowdown in China better than people previously thought."
The Aussie, which is up 4.22 percent year to date, touched a high on Thursday of $0.9312 and was last at $0.9289, up 0.54 percent for the day.
(Reporting By Michael Connor in New York; Editing by Nick Zieminski)