* Dollar index stretches rally, hovers just below 5-mth high
* Dollar lifted after strong consumer spending data boosts yields
* Yen shows little reaction to weak Japan Q1 GDP data (Adds details and quotes, updates prices)
By Shinichi Saoshiro
TOKYO, May 16 (Reuters) - The dollar hovered near a five-month high against a group of major currencies on Wednesday, as a surge in the benchmark 10-year Treasury yield above 3 percent reignited a rally that had lost steam last week.
The dollar index versus a basket of six major peers stood at 93.270 after rallying to 93.457 overnight, its highest since Dec. 22. It was still 0.05 percent higher than Tuesday.
The dollar has gained since mid-April as easing tensions in the Korean Peninsula and moves by China and the United States to avoid a full-blown trade war allowed investors to focus on the yield advantage the United States enjoys over other countries.
The advance stalled last week after weaker-than-expected April U.S. inflation data, but regained traction overnight as strong U.S. consumer spending numbers sent long-term Treasury yields surging to a seven-year peak of 3.095 percent .
The 10-year Treasury yield had hovered around 3 percent since late last month on concerns about rising inflation and a ballooning federal budget gap. But until Tuesday, it was unable to convincingly break above 3 percent.
“The dollar stands to benefit, particularly against the euro, on higher Treasury yields. But against the yen, its advance could stall if the negative impact of higher yields on equities is prolonged,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.
The uptick in U.S. yields which unnerved equity markets and sent Wall Street shares significantly lower on Tuesday. The yen’s tends to draw demand in times of market turmoil and investor risk aversion.
“The next focal point is trying to figure out the yield levels which are bearable for equities,” Ishikawa said.
Broader risk sentiment was also dented after North Korea on Wednesday opted to suspend high-level talks with South Korea and said it may reconsider holding a summit with the United States if Washington continues to unilaterally insist on Pyongyang giving up its nuclear programme.
“North Korea hardening its stance again at an earlier than expected juncture is a risk that bears watching,” said Daisuke Karakama, chief market economist at Mizuho Bank in Tokyo.
The euro was 0.05 percent lower at $1.1833 after brushing $1.1815, its weakest since late December.
The dollar edged down 0.05 percent to 110.285 yen, having risen to 110.450 overnight, its strongest since Feb. 5.
The yen barely budged after data showed Japan’s economy contracted for the first time in nine quarters during January-March.
The Australian dollar was largely flat at $0.7475 after sliding 0.7 percent overnight. The New Zealand dollar last traded at $0.6874 after plumbing a five-month trough of $0.6851 .
The pound was a shade weaker at $1.3501 after slipping to $1.3452 on Tuesday, its lowest since Dec. 29. (Reporting by Shinichi Saoshiro Editing by Simon Cameron-Moore)