(Bloomberg) -- The dollar fell as revised data showed the U.S. economy shrank for the first time in three years, increasing the case for the Federal Reserve to maintain record-low borrowing costs to stimulate growth.

The U.S. currency weakened as gross domestic product contracted 1% in the three months through March, government figures showed today, after a reading last month signaled 0.1% expansion. The dollar fell earlier against the yen as Treasury 10-year note yields declined to a nine-month low relative to similar-maturity Japanese government debt.

“It’s almost June and we’re talking about Q1 data, but yes, it’s clearly a weak number,” Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said in a phone interview. “Like everyone else, I’m a dollar bull. On most long-term fundamental measures, the U.S. growth prospects look more secure than Europe.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, dropped 0.2% to 1,011.45 as of 8:40 a.m. in New York.

The euro rose 0.2% to $1.3621. Europe’s shared currency was little changed at 138.50 yen. The dollar dropped 0.2% to 101.70 yen.

FED POLICY

The Fed is scaling back the bond-buying program it has used to pump money into the economy, trimming monthly bond purchases to $45 billion a month from as much as $85 billion. It has expanded its balance sheet to more than $4.3 trillion since 2008 in bond purchases designed to lower longer-term borrowing costs. The Fed also has held the benchmark interest rate target at virtually zero since December 2008.

Policy makers are watching progress toward their goal of full employment as they consider the timing of the first interest-rate increase since 2006. Minutes released May 21 of the Fed’s April meeting showed officials said continued stimulus to push unemployment lower doesn’t risk sparking an undesirable jump in the inflation rate.

Fed Chair Janet Yellen testified to lawmakers May 7 that the central bank will probably end bond buying under the quantitative-easing stimulus strategy late this year if the labor market continues to improve.

The U.S. is likely to start raising interest rates in the second half of next year, Fed Bank of Atlanta Fed President Dennis Lockhart said May 27 at Louisiana State University in Baton Rouge, Louisiana.

TREASURY YIELDS

The U.S. 10-year yield fell to 2.43% earlier today, narrowing the premium it offered over comparable Japanese debt to 1.85 percentage points, the least since August.

The U.S. has further to go to achieve full health, Yellen said on May 7. Bank of Japan policy makers refrained from expanding monetary stimulus after a two-day meeting ended May 21. Board member Sayuri Shirai said it will take longer than two years to achieve the bank’s 2% inflation target, according to the text of a speech today in Naha, Okinawa.

“The U.S. bond yield story is still extremely relevant to dollar-yen,” said Ray Attrill, the global co-head of currency strategy at National Australia Bank Ltd. in Sydney. “You don’t need to look too far beyond 10-year Treasury yields going below 2.5% to explain why dollar-yen is trading pretty heavily.”

The euro rose from almost a 3 1/2-month low before European Central Bank Governing Council member Carlos Costa speaks tomorrow, and even after Executive Board member Yves Mersch said yesterday officials are “comfortable” with conventional and unconventional measures.

Economists surveyed by Bloomberg News predict official data tomorrow will show retail sales growth in Germany was 0.2% last month, holding near the 0.1% pace in March that was the slowest this year.

Australia’s dollar climbed as data showed capital expenditure plans that Commonwealth Bank of Australia said exceeded analysts’ estimates.

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