FOREX-US dollar hits 2009 low as risk appetite increases

* Euro having best day vs dollar in more than a month

* U.S. economy contracts 1.0 percent in Q2

* GDP report shows renewed decline in consumer spending

* Business activity in the U.S. Midwest improves (Updates prices, adds quote, changes byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, July 31 (Reuters) - The dollar fell to its lowest for the year on Friday, weighed down by higher oil prices, steady stock prices and data showing an unexpectedly small contraction in the U.S. economy, boosting risk appetite.

Month-end flows as investors rebalanced portfolios also weighed on the dollar, traders said, curbing demand for the greenback as a safe haven. The dollar extended declines after key technical levels were breached.

Government data on Friday showed U.S. gross domestic product shrank at a slower-than-expected pace in the second quarter, although the report also showed a drop in consumer spending. For related news click [ID:nN31416560].

"I don't think the GDP report is all that bad. Looking at the data, the liquidation in the first half of the year is quite positive for second-half growth," said Adam Boyton, senior currency strategist at Deutsche Bank in New York.

That has contributed to the overall recovery theme and boosted risk appetite, he added.

Further adding to the positive risk tone was the surge in commodity prices, with oil prices rising nearly 3 percent CLc1.

In mid-afternoon trading in New York, the ICE Futures U.S. dollar index, which tracks its movements against a basket of six other major currencies, fell 1.3 percent to 78.291 .DXY, after falling as low as 78.220, a fresh 2009 low.

At current prices, the dollar index was on track to post a 2.3 percent fall for July.

The euro EUR= rose 1.3 percent on the day to $1.4252, its biggest one-day gain in more than a month. The euro zone's single currency was up 1.6 percent for July.

The dollar fell 0.8 percent against the yen to 94.71 yen JPY=. The euro rose 0.5 percent versus the Japanese currency to 135.03 EURJPY=R.

Data showing business activity in the U.S. Midwest in July increased more than expected also boosted demand for riskier assets, analysts said. Continued...