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FOREX-Risk appetite props up dollar after worst week in two months

* Euro tumbles after comments from ECB's Coeure

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

LONDON, Sept 11 (Reuters) - The dollar edged higher on Monday after posting its biggest weekly drop in two months as a decline in risk aversion spurred some investors to cover their short positions before U.S. inflation data later this week.

"We have seen investors selling dollars for several weeks now and the weekend combination of risk sentiment getting better and China's reserve requirement news has led to some much needed good news for the greenback," said Alvin Tan, an FX strategist at Societe Generale in London.

North Korea marked the 69th anniversary of its founding on Saturday without resorting to any further missile or nuclear tests, fueling some unwinding of safe-haven bets such as gold and government debt and pushing shares higher.

The dollar added 0.6 percent against its perceived safe-haven Japanese counterpart to 108.45 yen, moving away from a 10-month nadir of 107.32 yen touched on Friday.

The dollar index, which tracks the U.S. unit against a basket of six major currencies, was 0.2 percent higher at 92.51, after skidding to a 2-1/2 year low of 91.011 on Friday.

U.S. inflation data is due on Thursday and recent comments from Fed policymakers show a split on the outlook for inflation and how that will play out for future interest rate increases.

The euro tumbled towards the day's lows and bond yields eased after ECB board member Benoit Coeure said improved euro zone growth can offset some of the negative effects of the euro's strength but a persistent exchange rate shock could drag down inflation.

Coeure added that given the persistent challenges faced by the ECB in raising consumer prices, its definition of 'medium-term', the time horizon required to meet its inflation target, will be longer than usual.

The single currency fell below $1.20 after his comments to a low of $1.9935 before recovering partially.

The dollar's gains were also helped by news that China's central bank plans to scrap reserve requirements for financial institutions settling foreign exchange forward yuan positions with effect from Monday, according to four sources with direct knowledge of the matter who spoke to Reuters last Friday.

"The short term impact of this is that there are now fewer restrictions on banks' dollar purchases. One interpretation is that the pace of CNY appreciation has taken the PBoC, as well as the market by surprise," ING economist Iris Pang said in a research note.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s (Additional reporting by Lisa Twaronite in TOKYO; Reporting by Saikat Chatterjee; Editing by Mark Trevelyan)