* Yen falls to five-year lows vs dollar and euro
* Record levels on Wall Street weigh on low-yielding yen
* Sterling reaches highest versus dollar since Aug 2011
NEW YORK, Dec 27 (Reuters) - The euro jumped to its strongest level against the dollar in more than two years on Friday as banks adjusted positions for the year end, while the yen hit five-year lows for a second straight session.
The dollar was broadly weaker against European currencies, including sterling and the Swiss franc. Thin liquidity likely helped exaggerate market moves.
The European Central Bank will take a snapshot of the capital positions of the region's banks at the end of 2013 for an asset-quality review (AQR) next year to work out which of them will need fresh funds. This has created some demand for euros to help shore up their balance sheets, traders said.
"There's a lot of attention on the AQR, and there's some positioning ahead of the end of the calendar year," said John Hardy, FX strategist at Danske Bank in Copenhagen.
Comments from Bundesbank chief and European Central Bank Governing Council member Jens Weidmann also helped the euro. He warned that although the euro zone's current low interest rate is justified, weak inflation does not give a license for "arbitrary monetary easing."
"With little else to trade off of for most of the week, the market took the comment as an excuse to push the euro higher and to trigger automatic buy orders in the single currency," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
The euro rose as high as $1.3892, according to Reuters data, the highest since October 2011. It was last up 0.6 percent at $1.3774.
The currency has risen more than 10 cents from a low hit in July below $1.28, as the euro zone economy came out of a recession triggered by its debt crisis.
Unlike the U.S. and Japanese central banks, the European Central Bank has not been actively expanding its balance sheet, giving an additional boost to the euro.
The yen touched a five-year trough against the dollar and euro, dented by a renewed appetite for risk that lifted U.S. and German equities to record highs and weighed on the low-yielding currency.
The euro rallied 0.8 percent to 144.62 yen, having hit 145.67 yen, the strongest since October 2008.
The dollar rose as high as 105.01 yen, according to Reuters data, and was last at 104.99 yen, up 0.2 percent on the day.
The yen is on course to post its ninth consecutive week of falls against the dollar, the longest such period since 1974, when Japan was suffering from the aftermath of the oil crisis that started the previous year.
Many economists expect inflation in Japan to peak soon, forcing the Bank of Japan to take additional easing steps early next year to counter the impact of a sales tax hike in April.
"It looks as if there may be more ahead in terms of easing," said Geoffrey Yu, currency strategist at UBS.
The yen's decline came in thin year-end trade and was a continuation of a well-entrenched trend after Japanese authorities this year launched a shock-and-awe stimulus strategy to snap the economy out of years of deflation.
Treasury yields could rise further in 2014 if the Federal Reserve continues to scale back its bond-buying program, having last week taken the first step toward winding down its massive stimulus plan.
Sterling rallied after strong British mortgage data reinforced expectations the Bank of England may raise interest rates sooner than previously anticipated.
Sterling reached its highest versus the dollar since August 2011, with a traders citing an option being triggered at $1.65.
It reached a peak of $1.6577 before slipping slightly to $1.6490, up 0.5 percent on the day.