* Euro gains on strong German data
* Sterling falls on weak UK factory orders
* Market wary of Q2 earnings
(Recasts, updates prices, adds comment, adds detail, changes dateline, previous LONDON)
By Nick Olivari
NEW YORK, July 7 (Reuters) - The euro rose against the dollar and yen on Tuesday as an unexpected increase in German factory orders gave a boost to investors looking for signs of economic recovery and raised risk tolerance.
But investors were not willing to bet everything, with underlying caution ahead of the U.S. corporate earnings season providing some support to so-called safe-haven currencies such as the dollar and yen.
Sterling remained in negative territory against the dollar and euro as weaker-than-expected UK industrial production data reinforced doubts about an economic recovery.
No major economic data is scheduled for release in the United States on Tuesday.
"The U.S. dollar is mixed against the major currencies after failing to extend recent gains," said Meg Browne, senior currency strategist at Brown Brothers Harriman in New York in a note to clients. "Much better-than-expected German factory orders helped propel the euro back above the $1.40 area."
In early New York trade, the euro was up 0.4 percent at $1.4033, still near the day's high of $1.4050, after falling as low as $1.3900, according to Reuters data.
"The positive surprise from German figures may have helped push the EUR/USD a notch higher," said analysts at Calyon in a note.
The dollar index was down 0.2 percent at 80.182.
Sterling dipped to the day's low after data showed UK manufacturing output fell 0.5 percent on the month in May, versus expectations of a 0.2 percent rise.
The wider industrial production measure also fell by 0.6 percent against forecasts of a 0.2 percent gain.
Sterling last traded down 0.2 percent at $1.6242, according to Reuters data, though off the low of $1.6149.
"The risk is clearly that the 'green shoots' are turning dry," said Michael Klawitter, senior currency strategist at Dresdner Kleinwort in Frankfurt.
The dollar was down 0.1 percent at 95.29 yen. The euro was up 0.3 percent at 133.71 yen.
G8, EARNINGS
China, Russia and Brazil will use this week's Group of Eight leaders summit in Italy to push their view that the world needs to start seeking a new global reserve currency as an alternative to the dollar, officials said on Tuesday. But they also said that such a shift would take time.
A draft of the communique obtained by Reuters made no reference to the issue.
U.S. President Barack Obama and Russian Prime Minister Vladimir Putin did not discuss oil prices or the dollar in Moscow on Tuesday, according to a U.S. official.
Commodity-linked currencies such as the Australian and New Zealand dollar also retraced losses.
The Australian dollar was up 0.9 percent at $0.8030, recovering from 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.
Traders are bracing 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. (Additional reporting by Tamawa Desai in London) (Editing by Andrea Ricci)