* C$ eases to C$0.9934 vs. $US, or $1.0066 * Bond prices pick up across the curve * Retail sales unexpectedly fall * Bank of Canada, FOMC in focus By Solarina Ho TORONTO, Aug 22 (Reuters) - The Canadian dollar extended a retreat on Wednesday from 3-1/2 month highs hit in the previous session, hitting its weakest level in more than a week against the U.S. dollar after the government reported an unexpected drop in the country's retail sales for June. The decline in sales confirmed a weaker trend in consumer spending that will likely trim overall growth in the second quarter and raises questions about the Bank of Canada's hawkish slant on monetary policy. "It's consistent with the more general tone of risk-off," said David Tulk, chief Canada macro strategist at TD Securities. "It's a bit of a consolidation phase for the Canadian dollar and that's something that's accentuated by the weakness we see in retail sales." Doubts about Europe's progress on its debt crisis and weak export data from Japan also underscored the headwinds facing the global economy. Japan's exports slumped the most in six months in July as shipments to Europe and China tumbled, adding to concerns over global demand after a string of dire trade figures from Asia's export engines. At 10:16 a.m. (1416 GMT), the Canadian dollar was at C$0.9934 versus the U.S. dollar, or $1.0066, weaker than Tuesday's North American session close at C$0.9897, or $1.0104. After the retail sales data, it drifted as low as C$0.9948, or $1.0052, its softest level since Aug. 10. Currency strategists have noted in recent days that the Canadian dollar's rally is overdone, especially in relation to Europe where the market has gotten ahead of itself. "Without anything of substance to justify the rally, we are seeing a little bit of skittishness also reflected in risk assets," said Tulk. Bank of Canada's Mark Carney will be taking questions from reporters later on Wednesday, which could drive moves in the Canadian dollar. "Potentially, Carney has the ability to move the market quite significantly if he's as hawkish as he was taken to be a couple of weeks ago on reiterating the tightening bias which obviously no other central bank has," said Adam Cole, global head of foreign exchange strategy at RBC Capital Markets in London. Carney said in a speech on Wednesday that the strong Canadian dollar was not the main cause of the country's poor export performance. "Some blame this on the persistent strength of the Canadian dollar. While there is some truth in that, it is not the most important reason," he said, instead noting the overexposure to the mature and sluggish U.S. market was a more important factor. The central bank head, repeating language the Bank used last month when keeping rates unchanged, said "some modest withdrawal of the present considerable monetary policy stimulus" might become appropriate. Canadian bond prices picked up across the curve, with the two-year bond adding 8 Canadian cents to yield 1.142 percent, and the benchmark 10-year bond gaining 42 Canadian cents to yield 1.885 percent.