By Kevin Buckland

TOKYO, July 29 (Reuters) - The dollar languished near a six-week low to the yen amid a sharp retreat in Treasury yields after investors interpreted a shrinking U.S. economy as one more reason for the Federal Reserve to ease its foot off the tightening pedal.

U.S. second-quarter gross domestic product (GDP) contracted at a 0.9% annualized rate, according to the Commerce Department's advance estimate, released Thursday. That followed a first-quarter contraction of 1.6%.

Money markets currently give 76% odds that the Fed will slow the pace of rate hikes to half a point at the next meeting in September, against a 14% probability for a third consecutive 75 basis-point increase.

The dollar traded at 134.39 yen, bouncing 0.13% after an overnight plunge of 1.74%, the most since March 2020. It touched a low of 134.2 on Thursday, the weakest since June 17.

Long-term Treasury yields held around 2.67% on Friday in Tokyo, following a three-day decline.

The dollar index, which measures the currency against six top counterparts, edged 0.03% higher to 106.25, after dipping to a more than three-week low of 106.05 on Thursday, when it notched a 0.28% decline.

"Lower yields and positive risk sentiment is (a) tried and trusted recipe for a softer USD," although that weakness has been "flattered" by an outsized rally in the yen, Ray Attrill, the head of FX strategy at National Australia Bank in Sydney, wrote in a client note.

He warned, like many analysts have this week, that the market's "conclusion that the Fed has lost some of its hawkishness (is) debatable."

The GDP data came a day after the Fed raised rates by an as-expected 75 basis points and committed to not flinch in its battle against the most intense U.S. inflation since the 1980s, even if that means a "sustained period" of economic weakness and a slowing jobs market.

Fed Chair Jerome Powell said on Wednesday he did not think the United States was in a recession, based on the strength of the jobs market.

Two consecutive contractionary quarters are widely viewed by economists as signalling a technical recession. In the U.S., though, the National Bureau of Economic Research is the arbiter of recessions, which it defines as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators."

Meanwhile, the euro was flat at $1.01945 after a see-saw session on Thursday that ultimately ended with it little changed.