* Dollar index below two-week highs touched last week
* BoE hawk says slow wages, weak oil offers breathing space
* Long dollar positions trimmed further - IMM data
By Wayne Cole and Lisa Twaronite
SYDNEY/TOKYO, Dec 21 (Reuters) - The dollar drifted lower in light Asian trading on Monday amid doubts about how far and fast the Federal Reserve would raise U.S. interest rates next year.
The dollar eased to 121.20 yen JPY= and further away from Friday's brief peak of 123.59. The euro edged up to $0.0867 EUR= and the dollar was a shade weaker against a basket of major currencies at 98.680 .DXY .
The yen held gains made after Friday's decision by the Bank of Japan to merely tweak its stimulus campaign rather than outright expand the amount of assets it buys.
The resulting shakeout of long dollar positions was eerily reminiscent of the reaction to the European Central Bank's policy easing early in the month, which also disappointed the market's lofty expectations.
"Policy divergence relative to other major central banks remains, but the BOJ and, to a lesser extent, the ECB are already near the limits of what they can credibly deliver," Barclays (L:BARC) analyst Antonio Garcia Pascual wrote in a note.
"We see persistently weak core inflation as a global phenomenon and expect it to encourage a cautious stance at the Fed."
Barclays predicts the Fed will raise rates 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 hike rates again in March, but probably would not move as quickly next year as policymakers have suggested. urn:newsml:reuters.com:*:nL3N14736C
Investors have reacted by pairing back what had become a very crowded wager on further gains in the dollar.
Net long positions in dollars fell to their lowest since early November, according to Reuters calculations and data from the Commodity Futures Trading Commission. IMM/FX
Policy uncertainty also clouds the outlook for sterling.
One of the more hawkish board members at the Bank of England told the Daily Telegraph that the factors pushing down on inflation had "become a bit more prolonged" which offered "breathing space" before tightening.
Martin Weale was one of two BoE rate-setters who pushed in vain in late 2014 for higher borrowing costs, so his concession suggested there was little risk of a hike near term.
The reluctance of the BoE to move has been pressuring the pound for several months now. On Monday, it was pinned at $1.4912 GBP= and just above an eight-month trough of $1.4862. (Editing by Shri Navaratnam and Richard Borsuk)