* Dollar hits two-week lows against a currency basket
* Markets appear to be positioning for limited Fed taper
* Asian investors taking profits in dollar ahead of holidays
By Anirban Nag
LONDON, Sept 12 (Reuters) - The dollar eased to two-week lows against a basket of currencies on Thursday, as investors chipped away at its recent gains on growing doubts the Federal Reserve will scale back stimulus in a significant way next week.
The yield on the 10-year U.S. Treasury note, with which the index has a robust correlation, also fell to 2.88 percent, pulling away from recent two-year highs of 3.007 percent. The interest rate-sensitive two-year Treasury yield fell to 0.44 percent, well below recent highs of 0.52 percent with spreads over similar German bonds narrowing.
That helped the euro hold steady above $1.3300. The bulk of the dollar's losses came against the yen, falling 0.5 percent to 99.435 and leaving the dollar index down at 81.454. Chartists said the move below its 200-day moving average of 81.714 could prove bearish in the near term.
Analysts said with the threat of an immediate U.S. attack on Syria waning, the focus was on next week's Federal Reserve meeting. At the meeting the Fed is expected to kick start its stimulus withdrawal programme, but given that the U.S. jobs market is still not picking up pace it may sound a dovish note.
"It looks like the Fed will only make a modest $10 billion tapering next week. So investors are adjusting their positions accordingly," said Jane Foley, senior currency analyst at Rabobank. "The Fed will be very careful with tapering and will probably only dip its toe."
Since last Friday's disappointing U.S. non-farm payrolls data, markets have tempered their expectations for any aggressive moves by the Federal Reserve.
That has led investors to trim long dollar positions built in recent months on expectations the Fed will start unwinding stimulus by a much larger amount.
"Right now, it looks to us that investors expect about $10 billion tapering in September, combined with extremely dovish language, but no change in the timetable for ending QE," said Steven Englander, Citi's global head of G10 FX Strategy.
A Reuters survey of 69 economists on Monday also showed the majority expected the Fed to trim its $85 billion monthly bond-buying programme by $10 billion.
Traders said Asian players were taking profits in the dollar/yen before holidays. Japan will have two long weekends in a row while China and Korea will also have holidays next week.
The euro's rally against the yen also cooled off. It fell to 132.34 yen from a 16-week high of 133.375.
Meanwhile, the Australian dollar fell 0.9 percent to $0.9244 , after data showed a surprise drop in Australia's payrolls and a rise in the jobless rate to a four-year high.