CANADA FX DEBT-C$ falls as recovery questioned after US data

 * C$ falls to 96.48 U.S. cents

 * U.S. retail sales had risen for seven straight months

 * Bond prices rise following a slump in recent days
 (Adds details, updates currency and bond prices)

 TORONTO, June 11 (Reuters) - Canada's dollar fell against
the greenback on Friday morning after a weaker-than-expected
retail sales report in the United States, which consumes around
three-quarters of Canadian exports.

 U.S. retail sales, which had risen for seven straight
months, fell unexpectedly in May due to a record drop in
building materials purchases, which added to fears the economic
recovery may be losing some steam. [ID:nN11109609]

 Total retail sales dropped 1.2 percent, versus forecasts of
0.2 percent growth.

 "The soft U.S. retail sales report might flag a softening
of Canadian exports to the U.S., if the U.S. consumer is indeed
flagging," said Sal Guatieri, a senior economist at the BMO
Capital Markets.

 At 9:30 a.m., the Canadian dollar was at C$1.0368 to the
U.S. dollar, or 96.45 U.S. cents, compared with Thursday's
North American finish of C$1.0312 to the U.S. dollar, or 96.97
U.S. cents.

 The price of U.S. crude oil tumbled after the retail sales
report from the world's No. 1 energy user to around $74 a
barrel from $75. [O/R]

 Canada is the biggest oil supplier to the United States,
and its currency is often influenced by moves in oil prices.

 U.S. and Canadian stock markets opened lower on Friday.

 Despite the pullback, the Canadian dollar was up around 2.3
percent this week as investors' fears over the sovereign debt
situation in Europe eased.

 "For the moment, the market still seems to be pretty
positive on risk (coming out of Europe) relative to where it
was three or four days ago," said Shane Enright, a currency
strategist at CIBC World Markets.

 He pointed out that Italy just carried out a successful
bond auction, following debt sales in Belgium, Portugal and
Spain in recent days, all of which all saw good demand.

 On the domestic data front, Canadian industrial capacity
surged in the first quarter, posting a record 2.9 percent jump
from the previous quarter. [ID:nN11107657]

 The report, which is not normally seen as a market mover,
could end up supporting the Canadian currency, said BMO's
Guatieri.

 "It rose more than expected, which suggests the output gap
might be closing a little faster than the Bank of Canada
anticipated, which of course, argues for further tightening (of
interest rates)," he said.

 The central bank raised its key interest rate from a record
low earlier this month. It was the first monetary policy
tightening by a G7 country since the economic downturn.

 CANADIAN BONDS EXTEND GAINS

 Canadian bond prices were higher at the long end on a
safe-haven rally, but unwound some of the gains they made
immediately following the U.S. data. Prices had fallen in
recent days as investor became less risk averse.

 The two-year government bond CA2YT=RR was flat, yielding
1.817 percent, while the 10-year bond CA10YT=RR rose 20
Canadian cents to yield 3.410 percent.
 (Editing by Jeffrey Hodgson; editing by Peter Galloway)