* 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
* Some see USD setback as temporary, in light of more recent data
By Lisa Twaronite and Ian Chua
TOKYO/SYDNEY, June 26 (Reuters) - The dollar languished near one-month lows against a basket of major currencies on Thursday, following a surprise downward revision to U.S. first quarter economic growth.
The dollar index fell as far as 80.091 on Wednesday, a low not seen since May 22, as investors reacted negatively to data that showed the U.S. gross domestic product contracted at a 2.9 percent annualised pace, the sharpest decline in five years.
The index, which tracks the greenback against a basket of rivals, recovered to 80.175 in Asian trade but was still down about 0.1 percent on the day.
While economists said other data showed the economy rebounding in this quarter and the weak first quarter GDP showing was mainly due to one-off factors, it still gave no reason to expect the U.S. Federal Reserve would increase interest rates anytime soon.
“It was very disappointing, and in the current situation we have very low vol, heading into month-end, and half-year end as well,” said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong. “So, the ducks are all lined up (for) U.S. dollar weakness.”
The benchmark U.S. 10-year Treasury yield skidded to a three-week low of 2.529 percent in the wake of the data. It recovered to 2.555 percent in Asian trade on Thursday, but was still below Wednesday’s U.S. close of 2.559 percent.
The euro bounced to a three-week high of $1.3652 on Wednesday and was slightly up on the day at $1.3633, while the Australian dollar popped back above 94 U.S. cents from a one-week low of $0.9354, and was last at $0.9401.
Sterling edged up to $1.6986, moving away from the previous session’s one-week low of $1.6952.
While the GDP was shocking, analysts at BNP Paribas said it was more of a temporary setback for the dollar than a sea change.
“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.”
Against its Japanese counterpart, the dollar slipped about 0.1 percent to buy 101.74 yen. The euro also inched lower to 138.70 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.
Investors awaited a key measure of U.S. consumer inflation, due to be released later on Thursday. The price index for personal consumption expenditures, watched by the Federal Reserve, is expected to have reached its highest since late 2012 in May.
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 and Simon Cameron-Moore)