You're in a terrible position here, so I can understand why it's so tricky to decide what to do. Since you posted some time ago, I'm wondering, did you decide to try any of the ideas mentioned by other posters? Or something else?
If the situation hasn't been resolved, I suggest (anonymously) calling a helpline about child abuse-- and calling ASAP. If your niece is being sexually abused, she has to be saved from that horror. By talking with a trained you can describe the particulars about the disturbing behaviors exhibited by your father and niece, and and then that person can help you figure out what to do.
If your father ever did Anything to you, or any other minor, tell the person about that, also, because that obviously makes it more likely. Please post about what happened, ok? I hope your niece is healthy and safe. You're very brave to even explore ways of helping in case anything is happening to her.
Definitely this child needs to go to the doctor to find the reason for her discomfort, always. You've only mentioned your dad asking for kisses, which is normal. When you say "when they play around" he gets too "feely", can you tell us how he plays with her that is having you question his motives? Have you ever questioned your father's actions in any way before this?
When you explain that she is touched in a manner that makes you think is too touchy. What do you mean, can you be more descriptive with the wheres and hows.
I admire this young girl for being observant and speaking up. However, accusing someone of molestation is very serious, and if such a thing is done in errorI someone will be stigmatized for life, even if innocent. So the first thing to do is go to a doctor to eliminate an infection as a cause for the discomfort.
Report the potential abuse anonymously. There should be programs to do so. They will investigate, and no one will have to know it was you.
Well, rashes are common if she is still in diapers. As for saying ow when peeing there are a lot of medical reasons for this too. But if you strongly feel that your dad is too touchy with her then maybe you should comment to your brother or his wife that you think grandpa is playing to agressively or sexually. You can plant the seed for them to explore further if they choose. Did you tell them about the rash and the peeing part? You should do that anyway in case it is a medical problem. And if she goes to the doctor for it they would probably be able to tell if it looks like abuse evn without the parents asking. Doctors are trained to see that kind of stuff with children who have problems with private parts. So, do not accuse, just plant seeds. I will pray that it is not happeneing and that you hang in there and do what you can.
Babies get a lot of diaper rash, and if she has a rash it DOES hurt and she would say "ow" when she peed or more especially pooping in her diaper. It does hurt.
Knowing your father your whole life, have you seen him molest babies?