By Richard Hubbard
LONDON (Reuters) - The euro hit a six-week low against the dollar on Wednesday after data showing the euro zone economy contracted more than expected in the first quarter of the year, strengthening the case for another interest rate cut.
The data also briefly halted a rise in European shares, which have gained nearly 10 percent since mid-April driven in part by the European Central Bank's decision to cut its main rate to a record low this month.
"If we look at the figures from this morning, Europe is still in the doldrums but liquidity is still dominating the market and investors are hoping at least that the second half of this year will improve," said Rabobank euro zone market strategist Emile Cardon.
The single currency, down roughly 1.4 percent against the dollar in May, fell 0.2 percent after the GDP data to a low of $1.2888.
The FTSEurofirst 300 index of European blue chip shares, which closed at a five-year high on Tuesday, paused in the wake of the GDP before resuming its climb. The index was later up 0.4 percent on the day.
ECB president Mario Draghi has said he will cut rates again if the growth outlook for the region worsens, making markets more sensitive to each data release.
"(Draghi is) trying to be transparent and tell the market that any sort of weak data would give them (the ECB) scope to cut again, and certainly that's the way the market is trading," said Greg Matwejev, director of FX Hedge Fund Sales and Trading at Newedge.
The euro zone has been stuck in recession since the end of 2011, and the latest data showed the region's economy shrank a further 0.2 percent in the January-March quarter.
Growth is expected to return to the 17-member currency bloc in the second half of this year, but economists see no chance it will recover strongly until at least 2015, the latest Reuters poll showed.
In contrast, a run of solid U.S. growth figures, which have underpinned expectations the Federal Reserve may wind down its asset-buying programme by the end of the year, drove the dollar to a 4-1/2 year high against the yen of 102.63.
Against a basket of major currencies, the dollar hit a high of 83.87 (.DXY), a peak not seen since last summer, the day before Draghi pledged to do "whatever it takes" to save the euro.
European shares climbed on the longer-term view on the economy.
"(Equity investors) are buying for the medium term, betting that things will improve on the macro front around September... Investors are buying every dip," said David Thebault, head of quantitative sales trading at Global Equities.
In the debt market 10-year Greek government bond yields tumbled a day after Fitch Ratings upgraded the country's sovereign credit ratings to B-minus from CCC, citing reforms that have reduced its risk of a euro zone exit.
However, most attention was focused on new issues with Italy getting ready to launch a new 30-year bond to follow the successful 10-year debt sale by Spain on Tuesday.
Market players expect solid appetite for the Italian bond, after investors, flush with central bank liquidity, also snapped up Slovenian and Portuguese debt this month in an ongoing search for higher-yielding securities.
In the corporate credit market, fast food giant McDonald's (MCD.N) was reported to be preparing a 10-year euro-denominated bond in what is likely to be the busiest week for new corporate supply in over two months.
The dollar's strength and a dimming outlook for Chinese economic growth posed a headwind for commodity markets.
China's factory output growth was surprisingly feeble in April and fixed-asset investment slowed, rekindling fears that a nascent recovery is stalling.
"We are starting to reach points where there is going to be a structural slowing in demand," said analyst Matt Fusarelli of consultancy AME Group in Sydney.
Three-month copper on the London Metal Exchange fell 1 percent to $7,168.50 a tonne, having logged its steepest fall in two weeks, a decline of 2.3 percent, on Tuesday and is down nearly 10 percent for the year.
Gold hit a three-week low, down $15.80 at $1,409.59 an ounce and stretching its losses into a fifth straight day.
Brent futures slipped towards $102 a barrel as concerns about rising supplies from the United States added to the bleaker outlook for global demand growth implied by the euro zone and Chinese economic data.
Rising U.S. shale oil production will help meet most of the world's new demand in the next five years, even if the global economy picks up steam, the West's energy agency, the IEA, said on Tuesday.
Brent crude slipped 37 cents to $102.23 a barrel. U.S. oil fell 71 cents to $93.50, declining for a fifth straight day and matching a similar losing streak in December.
(Editing by Hugh Lawson)