* Euro recovers towards $1.14
* Dollar slips for second day; yen rallies
* Volatility drops but analysts cautious on outlook
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Tommy Wilkes
LONDON, Aug 17 (Reuters) - The euro rose for a second day in a row on Friday as hopes that next week’s talks between the United States and China will ease trade tensions between the two pushed the dollar lower.
The Turkish lira’s continued recovery helped some emerging market currencies, although the Chinese yuan slipped slightly after Thursday’s big rise, underlining investor nervousness about volatility in developing markets.
The euro has been under pressure in recent weeks on worries about euro zone bank exposure to Turkey after the lira crashed this month. Concerns that Italy’s governing parties will agree a budget with high public spending have also weighed on the single currency.
The dollar has benefited as investors rush towards safety.
Alvin Tan, FX strategist at Societe Generale, said Friday’s moves were more to do with dollar weakness as investors show greater appetite for taking on risk than euro strength.
“Volatility seems to have fizzled out in the last 24 hours and the stability in the remninbi has helped emerging market currencies,” he said.
The euro ticked 0.1 percent higher to $1.1385 while the dollar index - a measure of the dollar against a basket of major currencies - fell 0.1 percent to 96.513.
Still, analysts saw limits to any euro rebound.
“Considering that European banks’ exposure to Turkey is relatively limited, this week’s reaction by the euro looked overdone. But the rise in Italian bond yields amid the country’s fiscal concerns may continue indefinitely and limit the bounce by the euro,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.
The Japanese yen, up 0.1 percent to 110.74, and sterling also capitalised on the greenback’s weakness to move higher.
China and the United States agreed on Thursday to hold a new round of trade talks on Aug. 21-22, supporting the yuan.
The Chinese currency’s slide in recent months, partly on the back of concerns about what a full-blown trade war with the U.S. would do to China’s economy, has rattled investors.
After a recovery on Thursday, the yuan in offshore markets slipped 0.2 percent to 6.8727, still far below its 2018 lows of 6.9587.
The Turkish lira rose half a percent to 5.7933 per dollar as sentiment improved. The closure of Turkish financial markets for a string of national holidays during Aug. 21-24 also provided some respite.
The lira plunged to a record low of 7.24 on Monday before mounting a three-day rebound, helped by factors including measures by the Turkish central bank to support its currency and Qatar’s pledge to invest $15 billion in Turkey.
However, there are still concerns over Turkish President Tayyip Erdogan’s policies to combat the country’s double-digit inflation and his row with Washington over detained American pastor Andrew Brunson.
The Australian dollar rose 0.1 percent to $0.7265, gaining for a second day, although momentum was lost after Reserve Bank of Australia (RBA) Governor Philip Lowe said interest rates would stay at record lows “for a while yet”. (Additional reporting by Shinichi Saoshiro in TOKYO Editing by Andrew Heavens)