FOREX-Dollar hits two-week lows, yen gets safety bid

(Adds Merrill report, latest prices)

SYDNEY, Dec 31 (Reuters) - The dollar slipped to fresh two-week lows on Monday as talk 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 Asian trading, the euro was buying $1.4736 <EUR=>, compared to $1.4714 late in New York on Friday and just off a two-week high of $1.4747. The dollar also skidded to 111.97 yen <JPY=>, from 112.63 late on Friday.

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 3.11 percent, far below comparable Euro yields of 4.0 percent.

Against a basket of six major currencies .DXY, the dollar eased 0.25 percent to 76.023. That came on top of a 1.9 percent decline last week, its worst weekly performance in over a year.

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

Traders noted a report in Britain's Observer newspaper which claimed Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) needed more capital and was in talks with Chinese and Middle Eastern sovereign funds to sell more of itself.

Just last week, Merrill announced a $6.2 billion capital infusion from Singapore's government and money manager Davis Selected Advisers.