* Japanese Q2 GDP data lifts risk appetite
* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh
LONDON, Aug 14 (Reuters) - The dollar edged lower against a trade-weighted basket of currencies on Monday after posting its biggest weekly drop in three weeks as expectations of U.S. rate increases dwindled further after weak inflation data.
With Japanese second-quarter growth expanding 1 percent quarter-on-quarter, fueled by rising consumption and capital expenditure, investors stepped in to buy risky assets after tensions over North Korea.
Renewed risk appetite also encouraged investors to borrow in relatively weak currencies such as the dollar and the franc and invest in the euro which is the best performing currency in the G10 FX universe.
"Despite some near-term headwinds for the euro after the recent rise, it is set to rise against the dollar because of the relatively favorable economic outlook," said Rob Carnell, head of research at ING in Singapore.
The dollar was trading at 93.05, a shade lower from Friday's session when it came under pressure after softer-than-expected U.S. inflation data for July dampened expectations for another Federal Reserve interest rate hike this year.
Heightened geopolitical risks also weighed on the dollar's outlook.
Chinese President Xi Jinping said on Saturday that there needs to be a peaceful resolution to the North Korean nuclear issue, and in a telephone call with U.S. President Donald Trump he urged all sides to avoid words or action that raise tensions.
The euro rose 0.1 percent to $1.1827 and was approaching a 2-1/2 year high of 1.1910 hit earlier this month.
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(Reporting by Saikat Chatterjee; Editing by Angus MacSwan)