* Dollar, yen hold gains, supported by risk aversion
* Euro briefly hits day's high after strong German data
* Market participants await G8 meeting
(Adds comment, details)
By Naomi Tajitsu
LONDON, July 7 (Reuters) - The dollar was slightly higher on Tuesday, supported near a two-week high against the euro as fading optimism about the global economic recovery kept investors cool to risky positions.
The euro hit the day's high after stronger-than-expected German manufacturing figures suggested the country's economy was improving, but gains were limited as traders remained cautious about risk, largely brushing off a rise in European shares.
The yen also benefited from risk aversion, sticking near a five-week high hit against the dollar on Monday, while sterling, widely seen to be as high-risk, stayed under selling pressure, keeping it close to a one-month low versus the dollar.
Dismal U.S. employment figures late last week, which underlined ongoing weakness in the global economy and raised the possibility that a risk rally seen in past months may have been overdone, casting a pall on market sentiment.
"The risk is clearly that the 'green shoots' are turning dry," said Michael Klawitter, senior currency strategist at Dresdner Kleinwort in Frankfurt.
The market was watching for any comments in the debate on the dollar's role as the world's reserve currency before a meeting of leaders of the Group of Eight industrial nations and leading developing nations on July 8-10 in Italy.
By 1019 GMT, the euro was largely unchanged on the day at $1.3970, having fallen as low as $1.3904 in earlier trade, according to Reuters data.
The pair spent most of the day in negative territory, but rose to $1.3997 after data showed German manufacturing orders jumped 4.4 percent on the month in May, exceeding forecasts for a 0.5 percent rise.
Against a basket of currencies, the dollar was up 0.1 percent, while sterling fell 0.6 percent to $1.6184, staying near a one-month low of $1.6095 hit on Monday.
YEN PROSPERS
Despite the dollar's broad gains, it traded at 95.38 yen, unchanged on the day as the U.S. currency failed to gain against the yen as traders continued to flock to the Japanese currency, a popular safe-haven choice.
The pair was stuck near a five-week low of 94.66 yen hit the previous day, while higher-risk currencies including the euro, sterling and the Australian and New Zealand dollar each fell as much as roughly half a percent against the Japanese currency.
The Australian dollar was up slightly at $0.7979, recovering after a fall to $0.7935 after the Reserve Bank of Australia left interest rates at a record low 3.0 percent on Tuesday and left the door open to more easing.
Given escalating risk aversion, traders braced for second-quarter U.S. corporate earnings, which will be released in coming weeks. Analysts said poor results, especially from financial institutions, would likely crank up dollar demand.
"Traders may still be committed to the risk trade at the moment, but if bank earnings disappoint in any way or the S&P breaks crucial levels traders will probably start reducing long positions in (high-risk currencies) and the dollar could be bid more," said Chris Turner, currency strategist at ING in London.
Traders waited to see if participants at the G8 meet comment on reserve diversification. A draft of the communique obtained by Reuters made no reference to the issue.
Statements suggesting countries may be considering trimming their reserve holdings of U.S. assets have stung the dollar in past weeks, and analysts said more such comments may cap future gains. (Reporting by Naomi Tajitsu; Editing by Chris Pizzey)