* Dollar index hovers near previous day's 3-month low
* U.S. retail sales disappoint, Fed hike timing pushed out
* Kiwi jumps on strong local data (Updates prices, adds comments)
By Masayuki Kitano and Ian Chua
SINGAPORE/SYDNEY, May 14 (Reuters) - The dollar languished near a three-month low against a basket of major currencies on Thursday after surprisingly soft retail sales prompted some investors to wonder if the Federal Reserve can afford to hike interest rates at all this year.
The dollar index eased 0.1 percent to 93.540, having fallen to 93.461 on Wednesday, its lowest level since early February. It has now shed nearly 7 percent from a 12-year peak of 100.390 set in March.
The dollar's latest setback came after data on Wednesday showed that a key measure of U.S. retail sales was flat in April, confounding forecasts for a 0.5 percent increase and adding to other disappointing data that could see analysts downgrade their U.S. growth forecasts for the rest of the year.
"For me, the retail sales data came as quite a shock," said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
"It is possible that (U.S.) data for May and June could improve and cause the market's sentiment to change, but still, it was a weak outcome," he said.
Murata said that while a June rate rise by the Fed could not be completely ruled out, the most likely scenario is for the U.S. central bank to wait until September to raise interest rates, adding that a rate rise was likely before year-end.
Still, a rally in Fed funds futures <0#FF:> suggested that investors may be pushing out the timing for an eventual Fed tightening even further.
"Market expectations for a 2015 Fed hike have dropped further," said Elsa Lignos, senior currency strategist at RBC, adding market pricing for a first full hike is now drifting into early next year.
"From an FX perspective, it is a blow to the narrative that April would bounce back after Q1 weakness and gives further legs to the USD correction."
The dollar held steady at 119.13 yen, having retreated from Wednesday's intraday high of 120.10 yen.
The euro edged up 0.1 percent to $1.1369, clinging near a two-month high of $1.1392 set last week.
"A lot of this rebound in euro has to do with the sudden sell-off in German bunds and the consequent squeeze in bund yields higher," said Heng Koon How, senior FX strategist for private banking and wealth management at Credit Suisse in Singapore, referring to the euro's recent bounce.
Still, German bond yields will probably head back lower going forward due to the European Central Bank's bond-buying programme, Heng said.
"We see this as a temporary noise and would expect euro to head back down towards parity eventually," he added.
Sterling edged up 0.1 percent to $1.5758, having set a five-month high of $1.5768 on Wednesday even after the Bank of England cut its growth forecasts and cautiously backed bets in financial markets that it will only start to raise interest rates in around a year's time.
With the greenback losing steam, the Australian dollar hit a four-month high of $0.8164 earlier on Thursday and last traded at $0.8127, up 0.2 percent on the day.
The New Zealand surged 0.7 percent to $0.7536, a dramatic turnaround from a fall to a two-month trough of $0.7318 earlier in the week.
The kiwi was helped by local retail sales data showing a record 2.7 percent jump in the first quarter, blowing away any thoughts of a near-term interest rate cut. (Editing by Eric Meijer; Editing by Simon Cameron-Moore)