* Yellen says labour market far from healthy, but improving
* UK inflation lifts sterling, NZD dips on soft CPI
* Aussie shrugs off upbeat China GDP
By Lisa Twaronite and Ian Chua
TOKYO/SYDNEY, July 16 (Reuters) - The dollar clung to modest gains on Wednesday after bulls latched on to a comment by Federal Reserve head Janet Yellen that rates could rise sooner if employment continued to improve.
The Australian dollar, meanwhile, couldn't sustain a short-lived blip higher on better-than-expected Chinese growth data and it slumped as its New Zealand counterpart spiralled lower after benign domestic price data.
China's economy grew slightly faster than expected in the second quarter, bolstered by a burst of government stimulus.
The dollar index was last at 80.444, up about 0.1 percent on the day. The greenback was up about 0.1 percent at 101.74 yen after touching a one-week high of 101.77.
"Below the 101 yen figure, there are pure commercial orders from (Japanese) importers, but the upside is still capped," said Kaneo Ogino, director at Global-info Co. in Tokyo, a foreign exchange research firm.
"People are just waiting for the next trigger event," he said.
Speaking to a Senate committee on Tuesday, Yellen defended the U.S. central bank's loose monetary policy settings, saying the economic recovery was not yet complete.
Yellen said early signs of a pick-up in inflation were not enough for the Fed to accelerate plans for raising interest rates, but she conceded that this might change if labour markets improved more quickly than expected.
"The testimony does not change our Fed forecast, but it does support our view that there is a risk that the first rate hike may occur sooner than our June 2015 forecast if the labour market continues to improve faster than the committee expects," analysts at Barclays said in a research note.
The euro sagged about 0.1 percent to a one-month low of $1.3557.
Sterling dipped about 0.1 percent to $1.7131 after it scaled a six-year high of $1.7192 overnight as surprisingly strong British inflation and house price data prompted investors to raise bets that the Bank of England would lift interest rates before the year ends.
British inflation surged to a five-month high last month and house prices rose at their fastest pace in years.
In contrast, price pressures in New Zealand were benign, with the annual inflation rate coming in at 1.6 percent in the second quarter versus expectations of 1.8 percent. That was well within the Reserve Bank of New Zealand's (RBNZ) target range.
The results could take the pressure off the RBNZ to tighten policy much more this year, although another quarter-point hike next week seems a done deal.
The kiwi dropped on the data to a low of $0.8690, pulling further away from a recent high of $0.8839 and its post-float peak of $0.8842 set in August 2011. It last traded down about 0.8 percent at $0.8696.
Sentiment for the kiwi had already soured after international milk prices fell and volumes dropped at an auction held by New Zealand's Fonterra Co-operative Group, the world's biggest dairy exporter.
Its Australian counterpart also lost ground, shedding about 0.4 percent to $0.9333 despite the Chinese data.
China is Australia's largest trading partner, making the Aussie dollar a proxy for China plays, but this time the currency got little help from the better-than-expected data.
"Part of that may have been due to a statement by China's National Bureau of Statistics that a downturn in the property market creates short-term pressure on economic growth, a forward-looking statement that may have outweighed the significance of the backward-looking indicators," Marshall Gittler, head of global FX strategy at IronFX, said in a note to clients. (Editing by Stephen Coates and Alan Raybould)