NEW YORK (CNNMoney.com) - The dollar tumbled to an 11-month low against the euro and bond prices edged higher Friday after a report showed the U.S. economy bounced back in the first quarter but that inflation was largely in check.

The euro bought $1.2632, up from $1.2534 late Thursday. Earlier in the session the European currency scaled as high as $1.2635. The dollar traded at ¥113.82, down from ¥114.12 in the previous session.

The dollar fell sharply after the Commerce Department said first-quarter GDP grew at a 4.8 percent annual rate, its strongest pace in 2-1/2 years. Economists had forecast the figure to come in at 4.9 percent.

A key inflation gauge within the GDP report that measures personal spending with food and energy stripped out also revealed that the pace of price increases eased to 2 percent, compared to 2.4 percent in the fourth quarter last year.

The report signaled the economy was growing but not adding pressure on inflation, leading many currency investors to believe the Federal Reserve would soon halt its rate-boosting campaign.

"The ongoing story remains bearish for the dollar," Charmaine Buskas, FX analyst at Moody's Economy.com, told Reuters.

On Thursday, Fed chairman Ben Bernanke said the central bank could pause with its interest rate boosting campaign at some point, but said that further rate hikes would "increasingly dependent" on economic data (Full story.)

Policy-makers are expected to raise the target for the Fed's key short-term rate to 5 percent when they meet in May, but whether they'll keep boosting rates after that remains unclear.

Lower interest rates generally hurt the dollar as they make dollar-denominated securities less attractive to foreign investors.

Meanwhile, bonds edged higher as investors got a boost from the encouraging inflation news. Bond investors generally hate inflation since it erodes the value of their fixed-interest paying investments.

The benchmark 10-year Treasury note rose 2/32 to 95-22/32 to yield 5.06 percent, down slightly from 5.07 late Thursday. The 30-year bond added about 2/32 to 89-30/32 to yield 5.16 percent, down from 5.18 percent in the previous session. Bond prices and yields move in opposite directions.

The five-year note increased 3/32, yielding 4.91 percent, and the two-year note gained two ticks to yield 4.87 percent.

--from staff and wire reports

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