* Sterling hits record low vs euro, eyes parity
* Swiss franc rises on geopolitical risks
* Trade light ahead of year-end
By Masayuki Kitano
TOKYO, Dec 29 (Reuters) - Sterling hit a record low against the euro on Monday, hurt by its yield disadvantage against the single European currency and inching closer to parity.
A bleak outlook for the UK economy and expectations that euro zone interest rates are likely to stay higher than British rates in coming months, pushed sterling to a low of 96.315 pence on the Reuters dealing system.
"The trend of weakness in sterling is likely to continue for a while longer," said an analyst for a Japanese foreign exchange broker.
Sterling's fall against the euro gained momentum after some stop-loss sales at levels near 96 pence were triggered, said a trader for a European bank. If it hits parity against the euro, that would be the first time since the single European currency's launch in 1999.
A trader at another European bank cited hedge fund buying of euros against sterling, as well as buying of euros versus the dollar by Middle Eastern players.
Sterling fell as low as 96.59 pence, a record low against the euro but later trimmed some losses to stand at 96.39 pence, down 0.2 percent from late U.S. trading on Friday.
Amid thin year-end trade, the euro rose 0.9 percent against the dollar to $1.4154.
"Some people may prefer to park funds in euros rather than dollars ahead of the year-end, but I don't get the sense that there is any major portfolio shift taking place," said a trader for a Japanese bank, referring to the euro's rise on Friday.
Some market participants also noted that there was caution about potential speculative moves in light trade.
"You need to be careful, or you could end up falling into a hole," said an analyst for a Japanese foreign exchange broker.
GEOPOLITICAL RISK
The dollar fell broadly, especially against the Swiss franc, which rose on safe-haven buying as Israeli warplanes pounded the Hamas-ruled Gaza Strip for a third consecutive day on Monday.
"There are geopolitical risks, and the Swiss franc is being bought because of that, as is the theory in such cases," said a trader for a European bank.
The dollar declined 0.8 percent against the Swiss franc to 1.0590 francs.
It dipped 0.3 percent against the yen to 90.52 yen and also retreated versus sterling, falling 0.6 percent to $1.4666.
Some market participants said gains in the Swiss franc may not last long as investors shift their focus to near zero interest rates in Switzerland.
The trader for a Japanese bank said the dollar's fall may be a sign of things to come in 2009.
"There is the vague sense that the broad trend is toward dollar weakness," the trader said, adding that lingering uncertainty about the fate of U.S. "Big Three" automakers and the health of the U.S. financial sector could work against the dollar.
The dollar index, which measures the dollar's value against a basket of major currencies, has risen 5 percent for the year. But it has fallen 6.9 percent in December, the steepest monthly fall since its 7 percent drop in March 1985.
The dollar fell earlier this month, partly because of market expectations for aggressive monetary easing by the U.S. Federal Reserve. Such expectations were borne out by the Fed's decision in mid-December to slash interest rates to a range of zero to 0.25 percent. (Additional reporting by Yoshiko Mori and Kaori Kaneko; Editing by Edwina Gibbs)