* U.S. 1st-quarter growth revised lower, initial jobless claims rise
* Euro climbs to three-week peak versus dollar
* Japan public pension fund mulls shift after stock rally - sources
By Wanfeng Zhou
NEW YORK, May 30 (Reuters) - The U.S. dollar fell to a three-week low against the euro on Thursday after unexpectedly weak U.S. economic data dampened expectations the Federal Reserve will reduce its monetary stimulus soon.
Speculation the Fed could start slowing its bond purchases as early as the summer had fueled a strong rally in the dollar and pushed futures positioning to extended levels, leaving the currency vulnerable to a reversal, traders said.
The U.S. economy grew at a slightly slower pace in the first quarter than initially estimated, according to data released on Thursday. Separate reports showed initial jobless claims unexpectedly rose last week and pending home sales rose less than expected.
Analysts said the weaker data could reinforce expectations that the economy still needs a lot of monetary stimulus. Fed Chairman Ben Bernanke said this month that the U.S. central bank could "in the next few meetings take a step down" but only if economic improvement continued.
"We need two things, according to Bernanke, to consider tapering. That is, we need stronger data and we need more confidence of sustained improvement. And today's data simply does not support that conclusion," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.
"Don't bet on higher rates just yet from the U.S. I think that view is helping to support stocks and bonds, while at the same time undermining the dollar," he said.
The euro rose 0.8 percent to $1.3040, having reached a session peak of $1.3061, according to Reuters data, the strongest since May 9.
Against the yen, the dollar slipped 0.1 percent to 101.06 yen, retreating from a session peak of 101.80 yen.
The yen had come under pressure after sources familiar with the deliberations 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.
Traders said the news pushed Nikkei equity futures higher and caused yen selling. In recent months, Japan's stock market and the yen have showed a negative correlation. The yen is seen as a safe haven and tends to benefit in times of market stress.
Foreign investors' buying of Japanese equities has also contributed to yen weakness as they hedge currency exposure by selling the yen.
"The rationale behind the yen selling on the back of Japan's GPIF headlines seems linked to the hedging behavior of foreign investors buying Japanese stocks," said Valentin Marinov, head of European G10 FX strategy at Citi, in London.
"If the headline is confirmed, it could fuel a renewed Nikkei rally and hence more demand for short-yen hedges by foreign investors. This could trigger more dollar/yen buying from here."
Most market participants expect the dollar to continue to gain against the yen over the medium term on expectations of further easing by the Bank of Japan.
The euro rose 0.7 percent to 131.76 yen.
Adding to strength in the euro was data showing confidence in the euro zone economy grew more than expected in May.
Against a basket of currencies, the dollar index lost 0.7 percent to 83.063, having fallen to a two-week low of 82.989.
Despite the latest dollar weakness, Jens Nordvig, global head of FX strategy at Nomura Securities in New York, said he expects the dollar to strengthen meaningfully versus major currencies in the next six to nine months.
"The dollar has entered a new regime. We are observing a 'bull dollar rally': a dollar-strengthening trend which is happening in tandem with strong performance of risky assets and increasing optimism about U.S. growth," he wrote to clients.