* Dollar index below two-week highs touched last week
* Euro steady despite destabilising Spanish election result
* Yuan set stronger for first time in two weeks
* Long dollar positions trimmed further - IMM data (Adds more quotes, sterling rates)
By Patrick Graham
LONDON, Dec 21 (Reuters) - An inconclusive election result that may increase unease over Spain's financial stability did little to weaken the euro on Monday, while China's yuan was fixed stronger by authorities for the first time in two weeks.
The dollar index was broadly flat and dealers said currency markets were already firmly in holiday mode, but there are concerns that the run-in to the year end may yet bring some volatility.
"Liquidity has already gone substantially lower," said Thomas Suter, chief executive of currency focused Swiss hedge fund Quaesta.
"Probably it will get even worse and that does sometimes open the door for some unexpected moves."
Estimates of dollar positioning after last week's Federal Reserve meeting suggest the market is still net positive on the currency against the euro and other majors.
Given the still broad consensus among major bank analysts that the dollar will rise in the first quarter, the now minimal scale of those bets leaves room for some of the big money investors who have cashed up this month to buy back in.
"I find it hard to imagine big moves in the dollar against the euro or yen by the end of the year, but there is certainly some potential for it to gain against sterling or some of the commodity-linked currencies," said Simon Derrick, chief currency strategist at Bank of New York Mellon (N:BK) in London.
He pointed to concerns over UK growth and a debate in Britain about leaving the European Union as potential drivers for sterling selling going into the new year.
In morning trade in London, the dollar was up less than 0.1 percent against a basket of currencies. .DXY The euro dipped marginally to $1.0864 EUR= while the yen fell around 0.2 percent to 121.41 yen per dollar. JPY=
Sterling was marginally lower at $1.4885, while the Australian dollar fell a quarter of a percent to $0.7164 AUD= .
The 48 percent fall in Azerbaijan's now free-floating manat AZN= underlined how minimally the slump in oil and commodities prices has played out on major currencies such as the Aussie. Australia's biggest export, iron ore, has fallen by a third in price since September, in which time the Aussie is up almost 4 percent against the U.S. dollar.
The main topic of conversation on the majors remains the divergence in policy and economic outlooks between the United States and most of the rest of the world.
After last week's first U.S. rate rise in almost a decade, Barclays (L:BARC) predicts the Federal Reserve will hike by no more than 75 basis points next year compared to the 100 basis points assumed by the FOMC.
A Reuters poll of 120 economists found the Fed would raise rates again in March, but probably would not move as quickly next year as policymakers have suggested. ID:nL3N14736C
Positioning data from last Tuesday as predicted by Citi and others last week, showed a further trimming of net bets on the dollar. IMM/FX BNP Paribas' more current quantitative measures of positioning suggested short-term market players were continuing to cut those dollar positions.
"We would expect that activity to be balanced by demand from longer-term oriented market participants to use pullbacks to build USD exposure in anticipation of trend appreciation next year," BNP analysts said in a morning note.
(Editing by Alison Williams)