* C$ ends down at C$0.9997 vs U.S. dollar, or $1.0003 * Canadian bonds rally, outperform U.S. Treasuries * Domestic retail sales miss expectations in January By Claire Sibonney TORONTO, March 22 (Reuters) - The Canadian dollar hit a two-week low against its U.S. counterpart and bond yields dropped on Thursday after disappointing domestic retail sales figures added to worries about global growth following weak Chinese and European manufacturing data. Canadian retail sales rose by much less than expected in January and would have fallen had it not been for a healthy auto sector. "Let's face it - Canada is highly correlated with what's going on in the U.S. and Canadian consumers are extended," said Tom O'Gorman, director of fixed income at Bissett Investment Management in Calgary. "It was definitely disappointing," he added, but noted the Canadian currency was mostly following the trend in equity markets, which slipped on global manufacturing data that showed a drop in new orders in both the euro zone and China. The Canadian dollar ended the North American session at C$0.9997 against the U.S. dollar, or $1.0003, down from Wednesday's North American close at C$0.9923, or $1.0078. Earlier, the currency weakened to the other side of parity at C$1.0009 against the greenback, or 99.91 U.S. cents, its softest level since March 7. Brighter data for Canada's largest trading partner helped put a floor under losses. The number of Americans claiming new unemployment benefits dropped to a four-year low last week, bolstering hopes a recent pick-up in job growth will prove lasting. "It suggests that the improvement that we've seen in terms of these numbers recently has been sustained," said Shaun Osborne, chief currency strategist at TD Securities. He added that the Canadian dollar would likely stay within a narrow range with the greenback, between its 200-day moving average near parity with the U.S. currency and its 40-day moving average around C$0.9950. Looking to Friday, market observers will turn their attention to Canadian inflation data for February and any signals it may give on the timing of the next Bank of Canada rate hike. A global Reuters survey last month showed the median forecast for the next Canadian interest rate hike was pushed back to the second quarter of 2013. Higher interest rates tend to help currencies strengthen by attracting international capital flows and the prospect of monetary easing typically weakens them. "Given the upward drift we've had in short-term interest rates in Canada over the last little while, the CPI numbers are going to be important to determining whether we see the Canadian dollar weaken a little bit more, or if we see a bit more strength come back into this market," said Osborne. Canadian bond prices rose across the curve after the disappointing domestic data and amid the broader risk-off theme, outperforming U.S. Treasuries. The two-year bond was up 8 Canadian cents to yield 1.246 percent, while the 10-year bond rose 35 Canadian cents to yield 2.198 percent. The 30-year bond jumped 92 Canadian cents to yield 2.728 percent. "Remember it's the U.S. Fed that's printing money and not the Bank of Canada as well, so if you look at the very long end, while 10-years trade very close in yield, Canada's 30 is way through the U.S.," added Bissett's O'Gorman. "I think that's reflective of the fact that the 30-year bond is most sensitive to effects of inflation and currency debasement," he said.