* Dollar extends losses as U.S. triple-A worries mount
* Dollar index at 5-mth low, euro approaches $1.40
* Focus on U.S. Treasury auctions next week
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By Jamie McGeever
LONDON, May 22 (Reuters) - The dollar fell on Friday to its lowest in five months against a basket of currencies on concern about the triple-A ratings status of the United States after Britain's outlook was downgraded the previous day.
The dollar's weak technical position deteriorated further as the euro rose to within sight of $1.40 and sterling clawed back all the ground against the dollar and euro lost in the wake of Standard & Poor's move on Thursday.
S&P said it could downgrade Britain's triple-A credit rating, a move that initially hit the pound but then sparked broad selling of U.S. stocks and bonds on fears that record U.S. deficits could lead to the same warning.
After hitting five-month lows in the past three days, the dollar index is on track for its biggest weekly fall since the Federal Reserve launched its large-scale purchases of U.S. Treasuries in late March, which slammed the reserve currency on worries the move could cause an effective devaluation.
Minutes of the Fed's last policy meeting this week showed officials said they may need to boost such buying of Treasuries.
"The main issues are related to yesterday's movement on fears that the U.S. might lose its triple-A rating after S&P lowered the outlook to negative from stable for the UK," said Roberto Mialich, FX strategist at Unicredit in Milan.
While a U.S. downgrade seems "quite unlikely," S&P's move on Britain signaled that no country was too big to keep its top-notch credit rating for ever.
"This exacerbated the dollar's losses over the last few days ... (and) for the time being it's hard to imagine a sharp reversal of the dollar's trend," Mialich said.
At 0745 GMT on Friday the dollar index, a gauge of its value against six major currencies, was down 0.1 percent on the day at 80.38, having earlier hit a fresh 2009 low of 80.153.
The dollar index is down more than 5 percent so far in May, on track for one of its steepest monthly declines over the last quarter of a century.
The euro was up 0.3 percent at $1.3935. Earlier in the day it hit a five-month high of $1.3978, right at long-term technical resistance at the 55-week moving average of $1.3974.
Sterling was down 0.4 percent at $1.5780, after rising as high as $1.5898, its strongest since early November. Despite the S&P statement, "cable" is up 4 percent on the week, as traders have come to think that Britain is only one of many nations facing deep fiscal problems.
TREASURY TEST NEXT WEEK
Moody's Investors Service on Thursday said it is comfortable with its triple-A sovereign rating on the United States, but the rating was not guaranteed forever.
The perceived threat to the United States' top triple-A rating has certainly dealt another blow to the dollar this week.
Bill Gross, the co-chief investment officer at bond fund giant PIMCO, warned that the United States will eventually lose its top credit rating although others reckon this is highly unlikely.
A big test of investor appetite for dollars and dollar-denominated assets will come next week when the U.S. Treasury auctions $101 billion of two-, five- and seven-year paper.
"The new reality that policymakers in Washington are facing is that with declining risk aversion, investors are now demanding higher premium for holding the dollar and U.S. assets, especially government bonds," said Barclays Capital in a note.
"What is clear to us is that U.S. government bond yields need to rise significantly to stabilize the dollar but it is less clear if the Fed is prepared to accept much higher long-term yields under QE (quantitative easing)," they said.
The dollar's broad slide took it to a two-month low against the yen after Japanese Finance Minister Kaoru Yosano said on Friday the country is not thinking about intervention in the currency market. The dollar was last down 0.4 percent on the day at 94.10 yen.
U.S. financial markets will be closed on Monday for Memorial Day holiday, while British markets will also be shut for a holiday.