* Retail sales down for first time since February
* Euro gains after 1.5 percent decline on Monday
* Traders await Fed chair testimony (Adds late prices, quotes)
By Michael Connor
NEW YORK, July 14 (Reuters) - The dollar drifted lower against the euro and yen on Tuesday as a surprise drop in U.S. retail sales dented optimism about U.S. economic growth and clouded prospects for a September rate hike by the Federal Reserve.
U.S. retail sales slipped 0.3 percent last month, the weakest reading since February, as consumers cut back on purchases of automobiles and other goods, according to a Commerce Department report. Economists polled by Reuters had forecast retail sales rising 0.2 percent.
Coming after a disappointing employment report for June and a sharp drop in small business confidence, the weak retail sales data suggested the U.S. economy may have lost some momentum at the end of the second quarter after struggling in early 2015.
The euro, which fell 1.5 percent against the dollar on Monday in the wake of Greece's deal with creditors, was last up 0.03 percent at $1.1004.
The dollar was last off 0.10 percent at 123.23 yen, after dropping as low as 122.93. It earlier hit a 12-day high of 123.74 yen as the Japanese currency lost its safe-haven appeal with the worst-case scenario of Greece exiting the euro seemingly averted.
The dollar declined as much as nearly 1 percent against sterling, which jumped to a one-week high of $1.5638 after Bank of England Governor Mark Carney said the time for a first UK rate hike since the financial crisis was getting closer. It was last at $1.5628, up 0.90 percent against the dollar.
The dollar index of six currencies traded against the dollar was last off 0.18 percent.
With the Greek debt crisis temporarily off center-stage, traders acted cautiously ahead of scheduled congressional testimony on Wednesday and Thursday by Fed Chair Janet Yellen, according to David Gilmore, partner at Foreign Exchange Analytics in Essex, Connecticut.
Investors expect the Fed to start raising rates later this year, in contrast to the European Central Bank and the Bank of Japan, which are seen continuing with their ultra-loose monetary policies for the foreseeable future.
Separately, the Commerce Department said U.S. business inventories rose modestly in May, suggesting restocking will probably not contribute to economic growth in the second quarter. (Additional Reporting by Lucia Mutikani in Washington, Editing by Peter Galloway and Chizu Nomiyama)