* US economy shrank by annualised 2.9 pct in Q1
* Some see USD setback as temporary as data improves
* Sterling near recent highs after BoE’s housing measures
By Anirban Nag
LONDON, June 26 (Reuters) - Sterling rallied against the dollar on Thursday after new measures to cool the UK housing market failed to dampen rate rise expectations and a downward revision to U.S. GDP continued to weigh on the greenback.
The Bank of England tightened lending norms to the housing sector but its measures were less aggressive than many in the market had anticipated. That kept expectations for an interest rate rise as soon as by the end of this year intact.
Sterling rallied to a day’s high against the dollar of $1.7036 after the BoE released its Financial Stability Report - not far off a six-year high of $1.7064 touched last week - from around $1.7010 beforehand.
The dollar index languished near one-month lows in the wake of data, on Wednesday, showing a sharp contraction in U.S. gross domestic product in the first quarter, which suggested the Federal Reserve would be in no hurry to raise interest rates.
Economists, however, say the U.S. economy has since improved and the market will be looking for signs of that in personal consumption data due at 1230 GMT.
The price index for personal consumption expenditures, watched by the Federal Reserve, is expected to have reached its highest since late 2012 in May.
The dollar index was at 80.211, having fallen to as low as 80.091 on Wednesday, a low not seen since May 22. The dollar could get a boost if Thursday’s data shows consumption ticking up along with prices in May.
The benchmark U.S. 10-year Treasury yield, which skidded to a three-week low of 2.529 percent on Wednesday, recovered to 2.555 percent, but was still below Wednesday’s U.S. close of 2.559 percent.
“The GDP numbers were a shocker, but they are backward looking. The data lately have been good, especially a pick-up in consumer confidence, and if spending and inflation beat expectations today we could see the dollar recover,” said Niels Christensen, FX strategist, at Nordea.
“But most of the upswing in the dollar could come next week as month-end factors are likely to help the euro.”
The euro hit a day’s low against the pound of 79.905 pence as BoE Governor Mark Carney said the latest macro prudential norms to cool the housing sector would not change the outlook for monetary policy.
“With the consensus support for the pound underpinned by the outlook for the economic and monetary cycle, today’s actions are unlikely to significantly change that assessment,” said Josh O‘Byrne, currency analyst at Citi.
Britain’s housing market has made a swift recovery with prices up about 10 percent in the past 12 months. That has put the spotlight on the BoE’s ability to prevent a bubble forming without raising rates sooner than it is planning for fear of derailing economic recovery.
Against the dollar, the euro slipped to $1.3615.
The dollar fell 0.15 percent against the yen to 101.70 yen .
Still, yen gains were likely to be limited by expectations that the Bank of Japan might have to ease policy again by December, according to a Reuters poll published on Wednesday. (Editing by Susan Fenton)