Dollar tumbles on tepid second quarter growth

By Karen Brettell

NEW YORK (Reuters) - The dollar dropped on Friday after data showed that the U.S. economy grew at a slower pace than expected in the second quarter, while the Japanese yen soared after the Bank of Japan's stimulus plans underwhelmed investors.

U.S. gross domestic product increased at a 1.2 percent annual rate, the Commerce Department said. Economists polled by Reuters had forecast GDP growth rising at a 2.6 percent rate in the April-June period.

"There were some aspects of the GDP report that were not nearly as weak as the headline, but the headline affirmed that the Fed could wait for a while," said Alan Ruskin, global head of FX strategy at Deutsche Bank in New York.

The dollar has fallen since the Federal Reserve's statement from its policy meeting on Wednesday disappointed some investors who had thought the U.S. central bank might signal that a rate increase was possible in September.

Improving economic data in recent weeks has led many economists and investors to bring forward rate expectations, after previously pricing out the likelihood of a hike this year. December is seen as the most likely month for an increase.

The dollar index , which tracks the greenback against a basket of six major rivals, dropped 1.22 percent to 96.566, the lowest level since July 5.

Weakness was likely exacerbated by investors unwinding popular trades entered into before this week that the greenback would continue to strengthen on a hawkish Fed and a highly stimulative Bank of Japan.

The yen soared after the BOJ disappointed investors who had expected bolder measures to stimulate growth and raise inflation in Japan's ailing economy.

The yen jumped 3.05 percent against the dollar to 102.04 yen, the highest level since July 11.

Japan's central bank doubled purchases of exchange-traded funds (ETFs) and said it will conduct a thorough assessment of the effects of negative interest rates and its massive asset-buying programme in September, suggesting that a major overhaul of its stimulus programme may be forthcoming.

"I think the market's going to be punting this back and forth as to whether this is really a disappointment or whether they are playing for time," said Steven Englander, global head of foreign exchange strategy at Citigroup in New York.

Next Friday's U.S. employment report for July will be the next major indicator under scrutiny for clues on the strength of the U.S. economy.

(Editing by Paul Simao; Editing by Jonathan Oatis)