* Smooth Spain auction, German data boost euro
* ECB holds rates, market awaits Trichet news conference
* Traders cautious ahead of U.S. payrolls data on Friday
By Jessica Mortimer
LONDON, Aug 5 (Reuters) - The euro turned higher against the dollar on Thursday, lifted by a smooth Spanish debt auction and positive comments about Greece's progress in reducing its deficit from the International Monetary Fund.
The euro also benefited from data showing German industrial orders rose 3.2 percent in June, surpassing expectations thanks to strong foreign demand.
Investors brushed off the European Central bank's widely expected decision to hold interest rates at a record low 1.0 percent, and awaited a press conference by President Jean-Claude Trichet for his view on the euro zone's economic recovery.
Overall, trade was lacklustre as investors were wary of taking on big positions in the dollar ahead of key U.S. non-farm payrolls figures on Friday, which are expected to provide near-term direction for the U.S. currency.
"The euro is getting a boost from the Spanish auction and reacting to the IMF comments on Greece, but trade will probably be choppy going into tomorrow's payrolls data," said Paul Robson, currency strategist at RBS.
A senior IMF official told Reuters that Greece would receive a second tranche of international aid thanks to an impressive start on its austerity plan, and that it must now shift to drastic reforms to return to growth.
Spain on Thursday sold 3.5 billion euros of three-year bonds at a lower yield than a previous auction in June, suggesting solid demand for debt from the country whose debt problems have been under market scrutiny.
Analysts said Trichet may be upbeat about the euro zone economy when he speaks to the media at 1230 GMT, given recent successful bank stress tests, positive German economic data and solid European bank earnings, but that this is unlikely to be market-moving.
At 1148 GMT, the euro traded 0.4 percent higher on the day at $1.3206. It hovered near the day's high around $1.3225, recovering from a slide to $1.3120.
The session low took the single currency below $1.3125 -- the 38.2 percent retracement of the November to June decline -- and traders said a close below there could prompt further falls.
The dollar index slipped 0.2 percent to 80.695, taking it back under its 200-day moving average around 80.769. A close below that level may keep overall selling pressure on the U.S. currency.
PAYROLLS AHEAD
The dollar had edged up in earlier trade as traders unwound bets against the currency thanks to some better signs on the economy ahead of key U.S. non-farm payrolls figures on Friday.
An ADP report on Wednesday showed the U.S. added 42,000 jobs in July. Coupled with encouraging service sector data, that relieved some of the recent pessimism about the world's biggest economy, but traders said more good news was needed to overturn negative dollar sentiment.
Economists polled by Reuters estimated that Friday's data would show U.S. non-farm payrolls fell 65,000 in July as layoffs of federal census workers continued.
"No one will want to be short of dollars if there is a positive outcome," said Niels Christensen, currency strategist at Nordea.
"But nothing has changed the negative dollar environment."
The dollar slipped 0.2 percent to 86.08 yen, but stayed near an eight-month low of 85.32 yen hit on Wednesday.
Sterling edged up 0.2 percent to the day's high of $1.5925, tracking gains in the euro against the U.S. currency.
Market participants said the pound offered little reaction to the Bank of England's decision to hold interest rates at an all-time low of 0.5 percent, which had been expected.
Elsewhere, the New Zealand dollar fell 1 percent against the U.S. dollar after weak local jobless data while Canadian dollar-positive M&A speculation lifted the Canadian currency to a near three-month high versus the greenback. (Editing by Susan Fenton)