* Euro bounces off 2 1/2-month lows vs dollar
* Drop in benchmark U.S. yields seen undermining dollar
* Dollar near Thursday’s 2-month low vs yen (Updates prices, adds comments)
By Anirban Nag
LONDON, May 16 (Reuters) - Softer U.S. Treasury yields undermined the dollar on Friday and helped the euro rebound from the 2 1/2-month low it reached a day earlier.
The dollar slipped against the yen after taking a hit on Thursday, when benchmark U.S. 10-year Treasury yields fell to a six-month low of 2.473 percent. On Friday, the 10-year yield was 2.50 percent, well below the 2.67 percent levels seen earlier this week.
The dollar traded around 101.50 yen, close to a two-month low of 101.31 yen set on Thursday, with some Asian central banks cited as sellers. Support for the dollar lies at 101.20 yen, close to some intraday lows touched in March and the dollar’s 200-day moving average.
“Dollar/yen sits right at the bottom of its three-month range, with lower U.S. yields, weaker global equities, and an underperforming Nikkei forming a powerful combination,” said Adam Cole, head of G10 currency strategy at RBC Capital Markets.
European stocks started the day flat to lower, while Japanese shares, with which the yen has an inverse correlation, posted their third weekly loss in the past month. The yen usually gains when riskier assets lose.
The dollar may come under renewed pressure versus the yen if the U.S. 10-year’s yield falls further, after its breach of a recent trading range, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
“If there is a clear break below 2.5 percent, a (dollar) drop to levels below 101.00 yen will come into sight,” he said.
The drop in U.S. yields on Thursday caught some by surprise. Traders pointed to funds moving to safety after a sell-off in Greek bonds halted a rally in peripheral euro zone debt.
The sell-off in the periphery’s bonds has yet to affect the euro. Rather, a subdued dollar helped the euro rise to $1.3725 . The common currency had fallen as far as $1.3648 on Thursday, its lowest since late February, after data showed the euro zone economy grew less than expected earlier this year.
The euro was down about 0.2 percent for the week, putting it on track for its second straight weekly decline. Indeed, the euro has fallen roughly 2 percent since May 8 when European Central Bank President Mario Draghi told markets the bank was ready to provide new stimulus next month.
The disappointing growth figures on Thursday heightened those expectations. On Friday, euro zone current account numbers for March are expected to show another month of surplus.
Capital inflows have been one of reasons for the euro’s resilience this year, which has led ECB policymakers to try and talk it down in a bid to overcome disinflation. (Editing by Larry King)