* Dollar's recent gains unravel as U.S. yields retreat
* Fed confident in economic recovery but lowers some forecasts
* New Zealand dollar hits trade-weighted record high
LONDON, June 19 (Reuters) - The dollar sank to its weakest level in three weeks on Thursday after a cautious message from the Federal Reserve stopped well short of the aggressive signal of prospective higher interest rates expected by some in the market. In Europe, meetings of the Swiss and Norwegian central banks were the early focus . The euro traded at its highest level in 10 days against the dollar while sterling inched up to a new 5-year high of $1.7018 and the New Zealand dollar soared to a record high. New projections suggested the Fed saw rates rising more in 2015 and 2016 than it had previously forecast, but officials lowered their long-term rate target. The Fed also sounded comfortable with the inflation outlook despite recent signs of a pick-up in price pressure. Fed chief Janet Yellen said there had been "a slight decline of projections pertaining to longer-term growth" and officials lowered their view of the expected long-term federal funds rate from 4 percent to 3.75 percent. "There were those speculating that the Fed would have to come up with a more hawkish commentary and obviously they have been disappointed," said Neil Mellor, a strategist with Bank of New York Mellon in London. "Nothing has really changed from the past few days, so there will be a propensity to buy some euros, and probably sterling in lockstep with that." U.S. Treasury yields fell, with the benchmark 10-year rate dropping to 2.582 percent from the U.S. close of 2.615 percent. "U.S. dollar weakness is likely to be sustained unless we get a sea change in the communique coming from the Fed, so upside risks look likely for euro, kiwi and Aussie," said Sue Trinh, currency strategist at RBC Capital Markets. The dollar index traded at its lowest since May 27, down almost 0.5 percent on the day at 80.23.
CLOUD A further rise in oil prices underlined that investors remain deeply concerned by events in Iraq. The resulting search for safe havens for their money was underpinning traditionally safe bets like the yen, dollar and Swiss franc. The franc inched up to a session high of 1.2173 francs per euro after the Swiss National Bank kept all of its policy parameters steady. The yen was just over 0.1 percent higher against the dollar in early European trade, trading at 101.78 yen versus a one-week high of 102.38 yen before the Fed's announcement. The euro was slightly lower at $1.3589 after it touched $1.3600 on Wednesday. Another cloud looming on the horizon and sapping investors' risk appetite was Argentina's threat of default on its debt. On Wednesday, that country's government called it "impossible" to pay bond service due on June 30, citing a U.S. court decision earlier in the day. Commodity currencies fared particularly well against the dollar after the Fed announcement, with the New Zealand currency rallying nearly 1 percent to six-week highs of $0.8736. It was last down 0.1 percent from those highs at $0.8713. On a trade-weighted basis, the kiwi rose to a record high of 81.30. The outlook for higher New Zealand interest rates was reinforced by data showing the economy grew a solid 1.0 percent in the first quarter from the previous quarter, a result that cemented New Zealand as one of the fastest-growing developed economies. The Australian dollar was steady on the day at $0.9418 , having gained 0.7 percent on Wednesday.
(Additional reporting by Lisa Twaronite in Tokyo and Ian Chua in Sydney; Editing by Pravin Char)