* Dollar hovers near three-week lows
* Fed minutes taken as dovish, U.S. yields drop
* Swedish crown hit by inflation data (Updates prices, adds comments)
By Anirban Nag
LONDON, April 10 (Reuters) - The dollar weakened to near three-week lows versus the yen and the Swiss franc on Thursday after minutes from the Federal Reserve's March meeting disappointed investors positioned for a gradual shift in its monetary policy outlook.
In the European session, a big mover was the Swedish crown. It fell to its lowest in 3-1/2 months against the euro after inflation data disappointed and bolstered expectations of a rate cut by the Riksbank in coming months.
The focus, though, was broadly on the minutes of the Fed's March 19 meeting released on Wednesday. It showed officials were worried the bank's forecasts on interest rates might appear to investors as mapping out a more aggressive cycle of rate hikes.
Investors also interpreted the discussion in the minutes over the amount of slack in the labour market as dovish, all of which left the dollar struggling against most major currencies. Its losses were most against the yen which, given its safe-haven status, was also helped by weaker-than-expected Chinese trade data, traders said.
The dollar was down 0.3 percent at 101.685 yen, not far from Tuesday's trough of 101.55 yen which was its lowest since March 19. The dollar slipped against the Swiss franc to 0.8783 francs, its lowest in three weeks, as U.S. two-year Treasury yields fell sharply.
"The Fed minutes are pushing back rate hike expectations from the middle of next year to the latter part of 2015," said Jane Foley, senior currency strategist at Rabobank.
"The yen is also being supported by a pullback in risk sentiment after those Chinese data and disappointment earlier this week that the Bank of Japan will not ease policy soon."
The dollar index hit a three-week low of 79.430 earlier on Thursday, well below a seven-week high of 80.599 set only last Friday. It last stood at 79.516, down about 1.1 percent for the week.
The index has pretty much relinquished the gains made since the head of the U.S. central bank on March 19 suggested that rates may rise as soon as early next year. On March 19, the Fed said it would wait a "considerable time" after ending its asset-buying program before lifting interest rates.
EURO STEADY, AUSSIE FIRMER
Despite the dollar's struggles, the euro failed to extend gains and was last trading flat on the day at $1.3850. Traders are wary of pushing it higher, given expectations that the European Central Bank could step up its rhetoric against a strengthening currency and its impact on disinflation.
Bundesbank chief Jens Weidmann reiterated on Thursday that if there is a prolonged period of low inflation, the ECB will consider unconventional instruments. Last week, ECB chief Mario Draghi flagged the chances of quantitative easing to ward off deflation.
The common currency faltered against higher-yielding commodity currencies which extended gains against the dollar.
The Australian dollar broke above tough chart resistance at 94 U.S. cents after data showed that Australian employment grew more than expected in March. The data reinforced the view that Australia's central bank would keep interest rates on hold for a while and hold off from cutting them further.
The Aussie rose to as high as $0.9444, its highest level since last November, and up 0.5 percent.
"While there are some short-term signs of being overbought, it is looking strong on charts," said Teppei Ino, analyst for Bank of Tokyo-Mitsubishi UFJ.
The New Zealand dollar touched a high of $0.8746, its strongest level in more than 2-1/2 years. It last fetched $0.8735, up 0.2 percent on the day.
(additional reporting by Masayuki Kitano; Editing by Gareth Jones)