FOREX-Dollar subdued by rate talk, safe-haven flows

SYDNEY, Dec 31 (Reuters) - The dollar stayed soft on Monday as expectations of more U.S. interest rate cuts enhanced the euro's yield advantage, while the yen benefited from a reluctance to hold risky positions over the holidays.

In thin early Asian trading the euro was buying $1.4715 EUR=, compared to $1.4714 late in New York on Friday and just off a two-week high of $1.4727.

The dollar was still smarting from weak U.S. new home sales data out on Friday which only added to speculation the Federal Reserve would have to cut rates further next year, perhaps several times.

As a result, two-year U.S. Treasury yields dived to 3.12 percent, far below comparable Euro yields of 4.0 percent.

Against a basket of six major currencies .DXY, the dollar shed 1.9 percent last week, its worst weekly performance in over a year.

Meanwhile, geopolitical jitters and credit concerns kept investors away from carry trades, where they borrow at low rates in yen and Swiss francs to buy higher-yielding currencies.

Instability in nuclear-armed Pakistan after the assassination of opposition leader Benazir Bhutto had prompted investors to cut back riskier positions and buy save-haven assets like gold, Treasuries and the Swiss franc.

That kept the dollar restrained at 112.60 yen JPY=, having fallen almost a full percent on Friday to 112.63. Likewise, the dollar was pinned at 1.1281 Swiss francs CHF= after a 1.1 percent drop on Friday.

"It's been a tough quarter for most fund managers, so it's no surprise they don't want to hold aggressive positions over the holiday," noted Peter Pontikis, Treasury strategist at Suncorp Metway. Many markets close early on Monday for New Year while Tokyo is off until Friday.

"Then again, fund managers are sitting on an awful lot of cash right now and they'll have to put that to work in the new year," he added. "We suspect much of it will end up in U.S. assets which have been beaten down so far that they have to be tempting on a long-term view."

That could boost the U.S. dollar in coming weeks, particularly against the euro and Canadian dollar, argued Pontikis. There were no Japanese data due on Monday and little from the euro zone, leaving the focus on figures for U.S. existing home sales.

Median forecasts are for an unchanged annual selling rate of 4.97 million in November, but this is a volatile series and prone to large revisions. (Reporting by Wayne Cole; Editing by James Thornhill)