* Yen softens, dollar index down 0.2 percent at 79.981
* Sentiment recovers as stocks gain but wary before earnings
* Euro pares gains after weak German ZEW sentiment data
* Goldman Sachs results, U.S. retail sales/PPI data eyed
(Updates prices, changes byline)
By Jessica Mortimer
LONDON, July 14 (Reuters) - The dollar and the yen softened on Tuesday as gains in equities and oil prices, coupled with hopes for improved U.S. corporate earnings, encouraged investors to take on more risk.
This boosted perceived higher risk currencies such as the Australian dollar and sterling, which gained an additional lift from better-than-expected economic data from those regions.
The euro was steady against the dollar, however, as a weaker-than-expected German data dented hopes for a euro zone economic recovery and caused the single currency to pare back gains.
Market participants were also cautious about chasing prices actively ahead of key earnings reports from Goldman Sachs, as well as U.S. retail sales and producer prices data at 1230 GMT.
"The predominant effect on currencies is from higher stocks, which is reflective of greater risk appetite due to hopes of decent banking sector results," Investec economist David Page said.
"There is an incredible correlation between asset classes at the moment," he said, also noting a rise in oil prices back above $60 per barrel.
A broad dip in the yen and the dollar came as European stocks rose 0.9 percent and U.S. S&P 500 futures also pointed to a firmer start on Wall Street.
At 1056 GMT, the dollar rose by 0.1 percent against the yen to 93.02 yen, comfortably above a five-month low of 91.73 yen hit on electronic trading platform EBS on Monday.
The euro also rose 0.1 percent against the yen to 130.08 yen .
Against a basket of currencies, the dollar fell by 0.2 percent to 79.981, as measured by the dollar index.
After Goldman results on Tuesday, results from major U.S. financial companies Bank of America Corp, JPMorgan, and Citigroup are due later in the week.
Aside from U.S. corporate earnings, markets players will keep an eye on U.S. data. Analysts expect PPI will show a 0.9 percent rise compared with a 0.2 percent climb in May. Retail sales are expected to gain 0.4 percent after a 0.5 percent rise in May.
WEAK ZEW
The euro was steady against the dollar at $1.3977, staying stubbornly below the $1.40 mark and off an earlier session high of $1.4015.
The euro dipped after the German ZEW economic think tank's monthly poll of economic sentiment fell to 39.5 from 44.8 in June. This was far lower than market forecasts for a reading of 47.8, and the first setback for the index since October 2008.
"The stabilisation of the German economy is underway but it will not be as strong as latest data could make us believe," said Carsten Brzeski, economist at ING Financial Markets.
Separate data showed industrial production in the 16-country euro area gained 0.5 percent on the month but fell 17.0 percent year-on-year. The monthly rise, although lower than forecasts for 1.2 percent, was the first since August 2008..
Among perceived higher risk currencies, the Australian dollar rose 0.8 percent to $0.7890 and sterling gained 0.5 percent to $1.6315.
The two currencies were buoyed both by rising risk appetite and by firmer-than-expected data, including Australian business confidence data and UK surveys on retail sales and house prices .
Further UK data showed inflation falling below the Bank of England's 2 percent target in June, though this was in line with forecasts.
Elsewhere, markets will be looking ahead to a Bank of Japan policy decision on Wednesday. The BOJ starts a two-day policy board meeting on Tuesday and may announce that it will extend measures to support corporate finance, while keeping rates unchanged at 0.1 percent..
(Additional reporting by Tamawa Desai in London; Editing by Victoria Main)