* Dollar at session lows versus euro and yen on Q1 GDP disappointment
* Euro zone inflation up in April, but less than forecast
* Fed monetary policy decision in focus
* Yuan weakens, dealers eye implications for euro (Recasts with U.S. data, new throughout, changes byline, dateline, previous LONDON)
By Daniel Bases
NEW YORK, April 30 (Reuters) - A surprisingly weak first-quarter read on the U.S. economy sent the dollar careening lower on Wednesday against the euro and the yen, bolstering the case for the Federal Reserve to maintain its zero-interest-rate policy.
Inflation increased in the euro zone albeit at a lower than expected pace, data showed earlier on Wednesday. While the door for the European Central Bank to print money in a bid to boost economic activity is open given inflation is running below target, the data dampened slightly the expectation of anything being done imminently.
Investors were whipsawed after a stronger-than-expected ADP private sector U.S. employment report pushed the greenback higher, only to see it undermined by a paltry 0.1 percent growth rate in first-quarter U.S. gross domestic product. Economists had forecast a 1.2 percent GDP increase.
“That’s why you are seeing the dollar move. We have the Fed later today and this certainly is going to give Janet Yellen’s camp a lot more ammunition to remain on the more neutral to dovish side,” said Richard Cochinos, currency strategist at Citi in New York.
“Tapering will likely continue as expected, but give the Fed has suggested they are in very data-dependent mode this is the level of data that causes people to have a little bit of concern,” he added.
The Fed is expected to maintain near-zero interest rates and continue cutting monthly bond purchases by another $10 billion to $45 billion as part of its quantitative easing program. A decision is due at 2 p.m. EDT (1800 GMT).
The dollar showed little reaction to a stronger-than-expected reading of U.S. Midwest business activity. The Institute for Supply Management-Chicago business barometer was 63.0, up from 55.9 in March, which had been the lowest level for the index since August. Economists were looking for a reading of 56.7 in the month.
The euro was off an earlier three-week low to trade up 0.38 percent to $1.3864, near the session high $1.3870.
Investors sold the dollar to 102.27 yen, a loss of 0.33 percent on the day. The euro was flat against the yen, up just 0.02 percent to 141.75 yen.
The debate over the scale of disinflation in Europe has dominated markets this week, and lower-than-expected April price growth in the euro zone of 0.7 percent initially sent the euro to a three-week low against the dollar.
The Chinese yuan dropped to an 18-month low against the greenback, finishing at 6.2593 per dollar, down 0.02 percent . The currency lost 0.7 percent in April, and has depreciated 3.3 percent against the dollar so far this year. In 2013, the yuan strengthened 2.9 percent.
Dealers say the weakening yuan has led to the People’s Bank of China recycling some of the dollars it buys in the process into euros to rebalance its reserves.
“Every trader I know in London seems to be calling for a weaker euro. You can’t find anyone who wants it higher, yet it does not want to fall,” said a dealer with one London bank. (Additional reporting by Patrick Graham in London; Editing by James Dalgleish)