* Euro rises as yields drag down dollar
* Central banker speeches keep markets edgy
* Traders brace for German, Italian political developments
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Tommy Wilkes
LONDON, Feb 26 (Reuters) - The euro gained on Monday as a fall in U.S. Treasury yields dragged down the dollar, but trading was relatively quiet ahead of several speeches by central bankers and key political developments in Germany and Italy.
With the dollar’s bounce since it hit a three year-low on Feb. 16 fizzling out, the euro was able to rise 0.3 percent and climb to $1.2328.
But the euro remains 2 cents off its recent highs of more than $1.25 - the currency has rallied this year on the back of dollar weakness - and analysts said investors were cautious about taking big positions this week due to political risks.
Italians vote in a national election on Sunday, while the leading political parties in Germany, Europe’s biggest economy, will decide on a coalition deal that could secure Angela Merkel a fourth term as chancellor.
“We think the market may be underestimating the risks here – especially given that the euro’s pro-cyclical and portfolio inflow-driven rally could run out of steam if political risks stay slightly elevated in the near-term,” ING said in a note.
Analysts pointed to weekly futures data that showed net long positions in the euro had fallen for a third consecutive week. European Central Bank President Mario Draghi’s appearance in the European Parliament on Monday and euro zone inflation data due later this week also add to a nervous outlook for euro trading.
The dollar index, which measures the greenback against a basket of six major rivals, eased 0.2 percent to 89.685. It gained nearly 0.9 percent last week and pulled away from a three-year low near 88.25 set on Feb. 16.
A view that the dollar’s sell-off had been overdone, plus minutes from the Fed’s January rate-setting meeting that offered a relatively upbeat tone, helped give the dollar a lift last week.
The focus this week is Federal Reserve Chairman Jerome Powell’s first congressional testimony on monetary policy and the economy.
Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore, said the dollar was weighed down by a drop in the U.S. 10-year Treasury yield.
The U.S. 10-year Treasury yield eased a tad in Monday’s Asian trade to 2.866 percent, continuing a slip from the four-year high of 2.957 percent reached on Wednesday.
“He (Powell) probably doesn’t need to project any dovish image. But at a time when share prices have been unstable, he also doesn’t need to say anything that sounds especially hawkish on interest rates,” Okagawa said.
The dollar fell 0.1 percent versus the yen to 106.65 and erasing some of its earlier losses in Asian trading.
While stock markets started the week on a solid footing and pointed to strong risk appetite, futures data suggested foreign exchange investors were cutting their risk exposures, albeit from high levels.
Positions in risk-related foreign exchanges, particularly sterling and the Canadian dollar, fell, according to the data. (Additional reporting by Masayuki Kitano in SINGAPORE; Editing by Gareth Jones)