FOREX-Swedish crown falls on rate cut talk; dollar edges higher

* Riksbank minutes raise possibility of rate cuts

* Dollar shrugs off weak U.S. data, focus on Yellen

* Investors also eyeing euro zone inflation on Friday

By Laurence Fletcher

LONDON, Feb 26 (Reuters) - The Swedish crown fell against the euro on Wednesday after Riksbank policymakers said lower interest rates could be needed, while the dollar edged higher ahead of testimony by Federal Reserve Chair Janet Yellen on Thursday.

The euro rose to a day's high of 8.9550 crowns per euro , although still short of its two-month high of 9.0102 hit on Friday, after the Riksbank's minutes raised the possibility of further cuts in the repo rate if a pick-up in inflation failed to materialise.

Overall, trading was thin, with traders pointing to large option expiries and hedge funds cutting back positions as keeping major currencies in tight ranges.

The euro, which a week ago hit its highest level against the dollar since Jan. 2, was 0.1 percent lower at $1.3737. The dollar index was marginally higher at 80.153.

Investors are looking ahead to euro zone inflation data on Friday, ahead of next week's European Central Bank meeting, and Yellen's testimony, when she is expected to be quizzed on what a spate of soft U.S. economic data means for Fed plans to cut back its huge bond-buying programme.

"If you look at the U.S., the data has been weak but that's mostly weather-related," said Peter Kinsella, strategist with Commerzbank (Xetra: CBK100 - news) in London, who said he expects little movement in euro-dollar.

The dollar was largely able to shrug off data on Wednesday showing lower consumer confidence and a fall in regional manufacturing, offsetting solid gains in home prices.

Against the yen the dollar was 0.1 percent higher at 102.32 yen.

"Most of the event risk is confined to next week," said Stephen Gallo, FX strategist at BMO Capital Markets.

"Macro (Shenzhen: 000533.SZ - news) and other funds have also had a horrible month again, so I think you have already seen a paring of risk positions into month-end, with little if any desire to put anything new on."

The Australian dollar was 0.1 percent lower at $0.9010 , with a surge in volatility in the Chinese yuan so far having only a very limited impact on developed market currencies.

The dollar was last at 6.1248, compared with levels closer to 6.0600 just a week ago.

Spot yuan has entered a dramatic weakening cycle in recent weeks, guided downward by a series of weak fixings by the central bank, with additional momentum added to the slide by the unwinding of yuan positions by Chinese banks.

Many market watchers see the move as a prelude to a widening of the yuan's trading band and believe the currency's longer-term uptrend remains intact, despite recent data showing the economy is losing steam.

"Chinese macro economic risk is a factor capping the dollar against the yen," said Shusuke Yamada, chief Japan currency strategist at Merrill Lynch Japan Securities.

"Macro economic risks from the U.S., China and Japan have grown significantly. That said, such risks are unlikely to fully materialise until key data releases in April, and the dollar is likely to be range bound until then," Yamada (SES: MC7.SI - news) said.