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* C$ at C$0.9919 vs US$, or $1.0082 * U.S. retail sales boost sentiment * Euro zone data weighs * Bond prices mostly lower By Jon Cook TORONTO, Aug 14 (Reuters) - The Canadian dollar rallied to a session high against its U.S. counterpart on Tuesday, tracking riskier assets up after data showed U.S retail sales rose in July for the first time in four months. U.S. retail sales rose 0.8 percent last month, the Commerce Department said on Tuesday. It was the biggest gain since February and well above analysts' expectations, bolstering the view that the slowdown in economic growth during the second quarter will prove temporary. "It's only one month's data in a fresh quarter, but this is a pretty impressive U.S. retail sales print," Derek Holt, an economist with Scotiabank, said in a research note. Canada's currency firmed to C$0.9906 versus the greenback, or $1.0095, from around C$0.9916, or $1.0085, before the release. The U.S. number overshadowed weak euro zone data earlier on Tuesday. Europe's economy contracted by 0.2 percent in the second quarter, while Germany's forward-looking ZEW sentiment index slid for a fourth month running, undercutting even the lowest estimate in a Reuters poll. Canada's dollar weakened overnight after the euro zone data was released, touching a session low against the U.S. dollar at C$0.9941, or $1.0060. "The European GDP came in on expectations so there wasn't really a surprise there," said Mazen Issa, macro strategist at TD Securities. Around 9 a.m. EDT (1300 GMT), the Canadian dollar was at C$0.9919 versus its U.S. counterpart, or $1.0082, slightly higher than Monday's close at C$0.9925 against the U.S. dollar, or $1.0076. Markets have rallied recently on expectations the European Central Bank will step in next month to lower Spain and Italy's high borrowing costs after president Mario Draghi's recent pledge to do all it takes to preserve the currency. Hopes the Federal Reserve will also act to stimulate the economy, perhaps with another round of quantitative easing, or QE3, has put some downward pressure on the U.S. dollar. "It seems like (expectations of) QE3 is the bias right now in the market," said Issa. The Canadian currency has also received a boost following remarks last week from Bank of Canada Governor Mark Carney that signaled the central bank may still raise interest rates. Issa said the Canadian dollar would likely stay within a tight range between C$0.9915 and C$0.9941 versus the greenback, pending the release of Canadian and U.S. CPI data later in the week. Canadian bond prices were mostly lower. The two-year bond slid 5 Canadian cents to yield 1.167 percent, and the benchmark 10-year bond fell 27 Canadian cents to yield 1.831 percent.