FOREX-Dollar retreats as weak U.S. data weighs

* Euro heads for third week in positive territory

* German GDP numbers, ECB ruling on Greece aid euro

* U.S. consumer sentiment falls in February (Recasts, adds comment, U.S. data, updates prices, changes byline, dateline; previous LONDON)

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 13 (Reuters) – The dollar fell for a second straight session on Friday against a basket of currencies, pressured by yet another weak U.S. economic report and investors continuing to pare back overstretched long positions ahead of a three-day holiday weekend.

Thursday’s soft U.S. retail and jobless claims numbers didn’t help the dollar’s cause as well and that weakness spilled over to Friday. The dollar index was down 0.7 percent this week, on pace for its lowest weakly performance since mid-December. It was last at 93.976, down 0.1 percent.

U.S. consumer sentiment unexpectedly dropped in February, data showed on Friday. The University of Michigan’s preliminary February reading on the overall index on consumer sentiment came in at 93.6, below the final January read of 98.1.

The euro, meanwhile, was steady against the dollar, on course for a third straight week of gains, its best performance in just under a year. A far stronger-than-expected reading of Germany’s economic growth in the fourth quarter helped maintain a feeling of greater stability around the single currency, although Greece’s numbers were less upbeat.

“The biggest risk to the dollar bull case is a shift in growth outlooks, and consensus forecasts combined with today’s European GDP release warn that this risk might be building,” said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

“Our base case remains for dollar strength, but increasingly there are signs that the market is shifting,” she added.

In mid-morning trading, the dollar slipped 0.4 percent to 118.96 yen, down from a five-week high of 120.48 touched on Wednesday. The dollar has been weighed down by the drop in U.S. Treasury debt yields as economic data disappointed and as investors fretted about the developments in Greece and Ukraine.

The euro was up 0.2 at $ 1.1419. Three weeks of turmoil over Greece’s financing and future in the euro zone have done little to shake the euro itself. It was up almost 2 percent over that period.

Greek bond yields were sharply lower after the European Central Bank further raised a cap on emergency funding for Greek banks by about 5 billion euros to 65 billion euros.

Unable to reach an understanding on a broader deal this week, Greece and euro zone finance ministers will attempt again to bridge their differences at a meeting on Monday.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Patrick Graham in London)