In general the Catholic Church draws a line of distinction between Godparents and Christian witnesses. Christian witnesses merely attest to the validity of the baptism and make no promises. A Godparent, on the other hand, is considered by the Church to officially be a sponsor of someone entering the Church and thus should be a member of that same faith community.
In your situation there is a particular problem. If you were married in the Catholic Church or received permission to be married elsewhere, your wife promised to do all in her power to raise her children as Catholics. By having her child baptized Lutheran she is contradicting that promise. In such circumstances it would be especially inappropriate for a Catholic to act as a Godparent or Christian witness.
The 1993 Directory for the Application of Principles and Norms on Ecumenism (Directory on Ecumenism) explains:
98. It is the Catholic understanding that godparents, in a liturgical and canonical sense, should themselves be members of the Church or ecclesial Community in which the baptism is being celebrated. They do not merely undertake a responsibility for the Christian education of the person being baptized (or confirmed) as a relation or friend; they are also there as representatives of a community of faith, standing as guarantees of the candidate’s faith and desire for ecclesial communion.
a) However, based on the common baptism and because of ties of blood or friendship, a baptized person who belongs to another ecclesial Community may be admitted as a witness to the baptism, but only together with a Catholic godparent. A Catholic may do the same for a person being baptized in another ecclesial Community.