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* C$ at C$1.0456 vs US$, or 95.64 U.S. cents * Touches C$1.0488; weakest since December 2011 * Canada CPI rises 0.7 percent in May, below expectations * Bond prices mixed; 10-year yield holds near 2011 highs By Solarina Ho TORONTO, June 21 (Reuters) - The Canadian dollar dropped more than a cent on Friday to hit its weakest level against the greenback since December 2011 after Canadian inflation data for May came in below expectations. A jump in natural gas prices nudged Canada's annual inflation rate up to 0.7 percent in May from a 3-1/2-year low of 0.4 percent in April, but the rate remained well below the central bank's 2 percent target, confirming there is little pressure to raise interest rates soon. The market forecast was for 0.9 percent annual inflation in May. "That was definitely the driver this morning ... We've settled, not surprisingly. A much quieter afternoon once London packed it up for the week. But on balance, the underlying trend remains fairly bullish for the U.S. dollar," said Matt Perrier, director of foreign exchange sales at BMO Capital Markets. "I think we'll run into some resistance as we get toward C$1.05 and C$1.0525 initially ... I wouldn't be completely surprised to see the moves start to stall a little bit." The Canadian dollar finished the session at C$1.0456 versus the U.S. dollar, or 95.64 U.S. cents. Earlier, it sank as low as C$1.0488, or 95.35 U.S. cents, a drop of nearly a cent from its level just before the CPI figures were released. It was also well off Thursday's finish of C$1.0373, or 96.40 U.S. cents. Overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, fell after the inflation data, with some investors betting a Bank of Canada rate hike will now come later than previously expected. "At some point the Bank of Canada is going to have to address the weakness in CPI," said Mark Chandler, head of fixed income and currency strategy at RBC Capital. Separately, the value of Canadian retail sales for April also missed forecasts, inching up 0.1 percent from March, though economists noted that volumes showed strength. The Canadian dollar has lost some 2.8 percent this week, the bulk of it following Federal Reserve Chairman Ben Bernanke's comments on Wednesday that the U.S. economy was growing strongly enough for the central bank to begin slowing the pace of its bond-buying stimulus program later this year. Canada's two-year bond was down 9.5 Canadian cents to yield 1.236 percent, while the benchmark 10-year bond dipped 97 Canadian cents to yield 2.445 percent, holding near highs not seen since late October 2011.