* Euro recovers towards $1.14; dollar slips for second day
* Lira resumes weakening on U.S. sanctions threats
* Volatility drops but analysts cautious on outlook
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Adds quotes, details, updates prices)
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 limited dollar demand, although a fresh dive in the Turkish lira kept investors edgy.
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.
The dollar has benefited as investors rush towards safety, helping the greenback extend its four-month long rally. The U.S. currency this week hit a more than 13-month high versus its major peers.
Alvin Tan, FX strategist at Societe Generale, said Friday’s moves were more to do with dollar weakness as investors showed 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 renminbi has helped emerging market currencies,” he said, while cautioning that Italian political uncertainty would limit any euro upside.
The euro ticked 0.2 percent higher to $1.1394 after earlier breaching $1.14, while the dollar index - a measure of the dollar against a basket of major currencies - fell 0.2 percent to 96.437.
The Japanese yen strengthened 0.4 percent to 110.42, a four-day high, 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 has slid 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.
After a recovery on Thursday, the yuan in offshore markets slipped 0.2 percent to 6.8727 before steadying. It remains below its 2018 lows of 6.9587 reached earlier this week.
“Given that the trade topics are the dominating factor for CNY (Chinese yuan), the market can’t simply ignore it. One thing is clear: The market needs to prepare for more volatility over the foreseeable future,” Commerzbank analysts said in a note.
The Turkish lira snapped a three-day rebound and succumbed to selling pressure, sliding 5 percent to 6.1051 per dollar as investors fretted about the threat of more U.S. economic sanctions unless it hands over detained American evangelical pastor Andrew Brunson.
That left the lira back at Wednesday’s levels but below a record low of 7.24 touched on Monday.
Investors remains highly concerned about Turkish President Tayyip Erdogan’s policies to combat the country’s double-digit inflation, the ability of the central bank to act independently for macroeconomic stability and the row with Washington over Brunson.
The Australian dollar rose 0.1 percent to $0.7266, 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”. ( Editing by Andrew Heavens and Alison Williams)