NEW YORK (Reuters) - The dollar fell to multi-week lows against the euro and the yen on Friday after a report showed U.S. economic growth cooled in the first quarter, raising the prospect of further stimulus from the Federal Reserve.
The weaker-than-expected growth showed businesses cut back on investment and restocked shelves at a moderate pace at a time when investors are worried that lack of job creation will stem consumer spending.
The euro was already higher after a smooth Italian bond auction eased concerns over peripheral euro-zone debt markets and offset jitters sparked by a downgrade of Spain's sovereign debt and dismal Spanish economic data.
The U.S. economic data added to the dollar's woes, sending it to its lowest since mid-April against the yen.
"GDP was worse-than-expected, and that increases the chances of Fed launching QE3," said Daniel Hwang, senior currency strategist at Forex.com in New York. "Markets shrugged off the Spanish rating action, and we could see risk assets continue upward momentum on expectations of a Fed move. This is negative for the dollar as it increases QE3 chances."
The euro rose to a three week high of $1.3270 and last traded at $1.3259 up 0.4 percent, well off the session low of $1.3155, according to Reuters data. The dollar was last down 0.5 percent against the yen at 80.62 yen.
The euro was already bid as the New York session began after Italy sold 5.95 billion euros of bonds, in an auction which analysts said went well.
That overcame a slew of bad news in the last 24 hours for the euro zone. Standard & Poor's cut Spain's credit rating to BBB-plus from A late on Thursday and gave it a negative outlook, warning it expects the government's budget deficit to deteriorate even more than previously thought due to economic contraction.
Spanish data released Friday highlighted the extent of economic weakness in the highly indebted country, with nearly a quarter of the nation's workforce unemployed and retail sales falling for the 21st consecutive month.
Spanish 10-year bond yields moved back above 6 percent on Friday, while investors sought safety in German bond futures which rose to record highs.
"If you look at the downgrade and economic data out of Spain, it makes pretty grim reading," said Jeremy Stretch, Head of European FX Strategy at CIBC Global Markets.
There was also talk of quasi official Swiss buying of euros against the Swiss franc which was keeping the euro buoyed against the dollar. The euro was little changed at 1.2013 Swiss francs with the session low of 1.2001 francs.
That was just off the floor set by the Swiss National Bank of 1.2000 Swiss francs, a level they have drawn as the line in the sand for franc strength against the euro.
The yen was firmer against the dollar and the euro after further easing measures from the Bank of Japan were seen as incremental rather than significant steps to try to dig the Japanese economy out of the doldrums.
The Bank increased bond buying by 10 trillion yen, expanding the target of its bond purchases to bonds with up to three years left to maturity from those with two years or less, and increased its buying of exchange-traded funds.
The Bank also extend the period of its asset purchases to June next year from December.
Japanese exporters were quick to buy the Japanese currency after hype about the BOJ's easing for weeks.
Market players said the BOJ's easing was no bazooka that would push the dollar beyond its 11-month peak touched last month.
"We are seeing a reappraisal of the effects of QE, which I don't think should lead to a weaker yen as a lot of the money will stay in Japan," said Maher at HSBC.
Reporting By Nick Olivari; Additional reporting by Julie Haviv in New York; Editing by Padraic Cassidy