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Dollar Surrenders Ground on Sobering US Data

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The U.S. dollar fell to a three-week low against the euro on Thursday after weaker-than-expected U.S. economic data boosted expectations the Federal Reserve will keep its monetary stimulus in place for longer.

The dollar also erased all of its gains versus the yen, which had come under selling pressure after a Reuters report on a proposed revision in the portfolio strategy of Japan's public pension fund.

The U.S. economy grew at a slightly slower pace in the first quarter than initially estimated as government spending dropped, data showed, while initial jobless claims unexpectedly rose last week.

(Read More: Sequester Drags on GDP; No Help From Job Market)

"Nothing too earth-shattering," said John Doyle, currency strategist at Tempus Inc. in Washington. But the slight reduction in first-quarter growth is "lending a little bit to the scope that the Fed will continue QE throughout the end of the year."

"Moving into next week, what we're going to see is a shift in attention to nonfarm payrolls as a better indicator for those taking bets on the ending of QE," he said.

The euro rose 0.8 percent to $1.3039, having reached a session peak of $1.31, according to Reuters data, the strongest since May 10.

The dollar was down 0.5 percent at 100.66 yen, retreating from a session peak of 101.80 yen.

(Read More: If Foreigners Are Net Japan Buyers, Who's Selling?)

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USD/CNY
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USD/SGD
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NZD/USD
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USD/HKD
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AUD/USD
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Sources told Reuters that Japan's Government Pension Investment Fund (GPIF) was considering a more flexible approach to allocations which could let investment in domestic stocks grow in rallying markets.

Given the recent negative correlation between equities and the yen, which tends to benefit during periods of financial stress, traders said the news pushed Nikkei equity futures higher and caused yen selling.

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