* Dollar extends losses from previous day vs euro
* NZ economy shrinks in Q1 for 5th straight qtr, dents kiwi
By Satomi Noguchi
TOKYO, June 26 (Reuters) - The dollar fell against a basket of currencies on Friday, extending losses made the previous day as investors shifted funds back into risky assets as the Federal Reserve appeared to confirm this week that it will keep interest rates low for a while.
Most Asian shares rose after U.S. shares rallied on Thursday as investors were also relieved that Fed Chairman Ben Bernanke withstood a barrage of pointed questions from Congress on encouraging Bank of America to go forward with its planned purchase of Merrill Lynch late last year.
Investor appetite for risk was also helped by the Fed and its counterparts around the world extending their currency swap lines on Thursday until February 2010 so they have U.S. dollars to lend in their markets.
The central banks' announcement came a day after the Fed left interest rates unchanged near zero and said it saw signs the deep recession was easing.
"The market is just relieved to see the Fed is not in that much of a hurry to take (tightening) action," said Takahide Nagasaki, chief FX strategist at Daiwa Securities SMBC.
"Almost every market is back to where it was about a week ago before the Fed, in the same way as oil prices are rebounding above $70 a barrel," Nagasaki said.
The dollar index, a gauge for the greenback's performance against six other major currencies, fell 0.3 percent to 80.114, towards a two-week low of 79.562 touched earlier this week before the Fed's policy decision.
The euro rose 0.3 percent to $1.4040 and towards a two-week high of $1.4139 hit earlier this week.
Still, market players hesitated to chase the euro or other currencies higher without hard economic evidence because they suspect that the rallies in the past few months have got ahead of economic recovery.
Earlier this month the euro climbed above $1.43, its highest since late December, while the Australian dollar leapt above $0.8250 to hit its highest since late September.
Japanese consumer prices fell at a record pace in the year to May, adding to other weak signals about the health of the global economy.
The New Zealand dollar fell after news that the country's economy contracted for the fifth quarter in a row in January-March, backing the central bank's view that interest rates will stay at current low levels well into 2010.
The kiwi was down 0.4 percent at $0.6440, and down 0.4 percent at 61.73 yen.
Against the yen, the dollar erased earlier losses to trade at 95.92 yen, nearly flat on the day, as some traders sold the yen back in anticipation that yen-selling flows related to Japan's investment trusts will emerge.
A further $4.3 billion worth of Japanese mutual funds investing overseas is expected to be launched between Friday and next Tuesday according to data complied by Reuters, following several funds that saw inflows of about $1.25 billion this week.
The dollar fell against the yen earlier as a sharp fall in U.S. long-term yields on Thursday prompted some options managers to sell the greenback to hedge options portfolios which have exposure to U.S. long-term interest rates, traders said.
The euro climbed 0.3 percent to 134.64 yen. (Editing by Michael Watson)