Sterling fell as weak industrial output data reinforced doubts about a UK recovery. The euro dipped against the dollar, but losses were capped by a surprise increase in German factory orders that initially pushed it to a session high above $1.40.

When risk aversion rises, investors often cut holdings of stocks and higher-yield currencies and buy back the yen and dollars that were used to finance the trades.

“We’ve been getting very mixed signals, with some positive data and some very poor data, so it’s extremely difficult to pinpoint direction,” said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York.

“As a result, people are backing out of high-yield assets and into the yen and dollar. Now, the focus will turn to corporate earnings as the main driver for the market.”

The dollar was last down 0.4 percent at 94.95 yen while the euro fell 0.6 percent to 132.44 yen and 0.2 percent to $1.3946 , according to Reuters data.

Sterling dipped to the day’s low just above $1.61 after data showed UK manufacturing output fell 0.5 percent in May, confounding expectations of a 0.2 percent rise.  It last traded down 0.8 percent at $1.6148.

“The risk is clearly that the ‘green shoots’ are turning dry,” said Michael Klawitter, senior currency strategist at Dresdner Kleinwort in Frankfurt.

EARNINGS, G8

The Australian dollar was down 0.2 percent at $0.7955 after the Reserve Bank of Australia left interest rates at a record low 3 percent on Tuesday and left the door open to more cuts.

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.

“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.

Analysts were also keeping an eye on this week’s Group of Eight leaders summit that starts in Italy on Wednesday.

China, Russia and Brazil have said they will push their view that the world needs to start seeking a new global reserve currency as an alternative to the dollar, though they admitted such a shift would take time.

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.

NEW YORK, July 7 (Reuters)

Concerns that Washington might nationalize big U.S. banks — which would wipe out shareholders and add to the fiscal burden — had weighed on stocks and other risky assets.

However, Bernanke said on Tuesday the significant value built up in the country’s banks would be lost if they were government-owned and though there could be a time when it became necessary to close banks down, now is not the time.

U.S. stocks rose more than three percent on Tuesday.

“It’s all about the equity rally we had last night and the U.S. shying away from nationalizing the banks,” said David Keeble, rate strategist at Calyon. MSCI world equity index rose 1 percent while the FTSEurofirst 300 index gained 1.5 percent.

Emerging stocks rose 1 percent. Oil rose 0.2 percent to $40.03 a barrel .

WANING STATUS

The yen fell as low as 97.33 per dollar , levels last seen in November. The Japanese currency also hit its weakest levels in almost seven weeks of 125.17 per euro .

A rapidly deteriorating domestic economy and political uncertainty has been hitting the low-yielding yen’s safe haven appeal, wiping out the inverse correlation between equities and the Japanese currency.

Wednesday’s data showed exports plunged a record 45.7 percent in January from a year earlier, with record slides in shipments to the United States, Europe and the rest of Asia pointing to a deepening recession across much of the world.

“The fundamental case for a weaker yen has become more pressing with Japan reporting its fourth monthly trade deficit in a row, suggesting that the current account surplus will melt down further, reducing commercial yen buying needs,” BNP Paribas said in a note to clients.

LONDON, Feb 25 (Reuters)