* Fed minutes prompt expectation of easing next month
* Dollar index falls below Ichimoku cloud
* Some say Fed may just extend its promise to keep rates low
* Soft China PMI cuts gains in euro, Aussie
TOKYO, Aug 23 (Reuters) - The dollar hit a two-month low against a basket of currencies on Thursday after minutes of the U.S. Federal Reserve meeting surprised traders by suggesting it is willing to deliver more stimulus "fairly soon".
That helped to lift the euro to a seven-week high against the dollar, though the euro cut gains after weak Chinese manufacturing data underscored concerns about a slowdown in the world's leading growth engine.
"The minutes were quite dovish, leading you to think that there will be some form of easing next month unless upcoming payroll data is surprisingly strong," said Ayako Sera, senior economist at Sumitomo Mitsui Trust Bank, referring to the U.S. employment report due on Sept. 7.
The dollars index dropped to its lowest level in two months to 81.368 .
In Asia, it managed to stay above 81.36, the 50 percent retracement of its May-July rally, though in a bearish technical sign, the index has fallen below the bottom of the cloud on the daily Ichimoku chart.
While some market players expect the Fed's likely easing to come in the form of a third round of bond buying, otherwise known as quantitative easing, others cautioned that the Federal Reserve may take a softer approach, such as extending the period it plans to keep exceptionally low rates in place instead.
The Fed has pledged to keep low rates at least through late 2014.
"Given mixed economic indicators of late, I doubt the Fed will embark on QE3 in September. If the Fed just extends the period of low rates, the impact on the currencies will be limited," said Makoto Noji, senior analyst at SMBC Nikko Securities.
As U.S. economic indicators since the Fed's policy board last met on July 31 - Aug 1 were fairly upbeat, the market is now hunting for clues on the latest thinking of Fed Chairman Ben Bernanke, who will give a speech at the annual informal conference of central bankers and economists at a retreat in Jackson Hole at the end of this month.
NO CRISIS NOW
As the dollar wilted, the euro rose to a seven-week high of $1.25534 and could rise further on option-related buying to around $1.26 in the near term, some traders said. It last traded at $1.2545.
The euro has gained more than four percent from its two-year low of $1.2042 hit late July, also helped by expectations that the European Central Bank will announce plans to help lower Spanish and Italian bond yields at its next policy meeting on Sept. 6.
Talk between Greece and its lenders, in particular the euro zone paymaster Germany, now looks likely to continue well into next month, wrongfooting euro bears who expected a major showdown later this week could stoke concerns of another crisis.
German Chancellor Angela Merkel said on Wednesday she and Greek Prime Minister Antonis Samaras will not make any decisions during their talks on Friday, adding she would wait for the lenders' report on Greek progress in meeting targets. That report is not expected until late September.
The euro, and the Australian dollar too, trimmed gains after the HSBC Flash China manufacturing purchasing managers index (PMI) fell to a nine-month low, a signal that a slowdown in growth has extended deeper into the third quarter.
"The data failed to dispel pessimism on the Chinese economy. The market will retain a cautious view on China, which will likely cap commodity currencies," said Koichi Takamatsu, head of forex at Nomura Securities.
The Australian dollar stood at $1.0520, up slightly on the day but off its 10-day peak of $1.0546 hit earlier in the session.
The U.S. dollar was soft against the yen after making its biggest one-day loss in nearly two months on Wednesday following the Fed's minutes.
The dollar fell to 78.273 yen late on Wednesday, its weakest in over a week, and last traded at 78.55 yen, down more than a full yen from a five-week peak hit on Monday.
Still, the dollar is likely to be supported around 77.50-78.00 yen for now, analysts say, because of wariness about intervention by Japanese authorities.
Talk of the Fed easing could prompt the Japanese central bank to consider easing as well, they said.
"When the Fed eases its policy, the dollar could fall below 78 yen. But I don't expect the dollar to fall substantially below 78 yen before any actual easing by the Fed," said Sumitomo Mitsui Trust's Sera.