* Dollar index drops to one-month lows after surprisingly weak GDP
* U.S. economy contracted at an annualised rate of 2.9 pct in Q1
* USD setback seen temporary as recent data more encouraging
By Ian Chua
SYDNEY, June 26 (Reuters) - The dollar languished near one-month lows against a basket of major currencies early on Thursday, having been knocked back hard after revised U.S. growth figures for the first quarter came in shockingly weak.
The dollar index fell as far as 80.091, a low not seen since May 22, as investors reacted negatively to data that showed the U.S. economy contracted at a 2.9 percent annualised pace, the sharpest decline in five years.
The result was far worse than anyone had expected and sent the benchmark U.S. 10-year yield skidding to a three-week low of 2.529 percent. It has since recovered to 2.561 percent.
While more recent data suggested the U.S. economy is still on the recovery path, the extent of the slowdown was large enough to spur dollar bears into action.
That saw the euro bounce to a three-week high of $1.3652 , while the Australian dollar popped back above 94 U.S. cents from a one-week low of $0.9354.
Sterling climbed to $1.6984 from a one-week low of $1.6952 and the Canadian dollar came within a hair’s breadth of a 5-1/2 month peak of C$1.0716 per USD set earlier in the week.
Analysts at BNP Paribas said the GDP shock was only a temporary setback for the dollar.
“We would not want to over-emphasize the importance of this backward-looking report, especially as the Fed has already highlighted it sees Q1 growth as distorted by weather and with more current measures of economic activity broadly pointing to a rebound in activity in Q2,” they wrote in a note to clients.
“Although there are clear headwinds for the USD at the moment...the fact that market positioning is overall flat on the USD suggests risks of a large dollar sell-off are quite limited.”
The data, however, brought some excitement to a market that has been suffering from something of a summer lull and the World Cup fever.
Unfortunately for Asia, another quiet session is in the making given an absence of any significant economic news.
The next interesting piece of data comes again from the United States, where a measure of consumer inflation watched by the Federal Reserve will be released.
In Europe, the Bank of England is expected to announce tough measures to rein in fast-rising British house prices, which Governor Mark Carney has warned are the biggest domestic threat to financial stability.
The EU summit also starts on Thursday with a working dinner on the EU’s long-term policy agenda before the contentious decision on the Commission presidency on Friday. (Editing by Shri Navaratnam)