* C$ at C$1.0385 vs US$, or 96.29 U.S. cents * CPI rises for second month, but weaker than expected * Bond prices rise across maturity curve By Solarina Ho TORONTO, July 19 (Reuters) - The Canadian dollar retreated modestly against its U.S. counterpart in subdued trading on Friday, as Canadian inflation data came in slightly weaker than expected. Canada's annual inflation rate rose in June for a second month, to 1.2 percent, after hitting a 3-1/2-year low in April, but price pressures remained muted as the central bank signaled an extended pause on interest rates. Month-over-month figures were 0.1 percent weaker than what economists polled by Reuters had expected. "The weak CPI is reducing any expectation the Bank of Canada will be hiking (rates) any time soon - not that there was any - but it signals the Bank of Canada will be on hold for a very long time," said Charles St-Arnaud, economist and currency strategist in New York. "It's a very, very slow session today ...very weak volumes so far in the market, especially in the Canadian dollar," he added, noting the commodities-linked currency was not reacting to other factors like higher oil prices. The Canadian dollar, which was underperforming most of its major currency counterparts, was trading at C$1.0385 versus the U.S. dollar, or 96.29 U.S. cents, at 9:48 a.m. (1348 GMT). This was softer than both prior to the data's release and Thursday's North American finish at C$1.0376, or 96.38 U.S. cents. The currency wasn't expected to move much beyond Friday's tight range between C$1.0360 and C$1.0393, with activity set to slow further once Europe closes for the weekend, St-Arnaud said. The price of government debt rose slightly across the curve after the data, with the two-year bond up 1.5 Canadian cents to yield 1.087 percent and the benchmark 10-year bond rising 21 Canadian cents to yield 2.374 percent.