* C$ at C$1.0456 vs US$, or 95.64 U.S. cents * Touches C$1.0488; weakest level since December 2011 * Canada CPI rises 0.7 percent in May, below expectations * Bond prices mixed; 10-year yield holds near 2011 highs By Solarina Ho TORONTO, June 21 (Reuters) - The Canadian dollar dropped more than a cent on Friday to hit its weakest level against the greenback since December 2011 after Canadian inflation data for May came in below expectations. A jump in natural gas prices nudged Canada's annual inflation rate to 0.7 percent in May from a 3-1/2-year low of 0.4 percent in April, but the rate remained well below the central bank's 2 percent target, confirming there is little pressure to raise interest rates soon. The market forecast was for 0.9 percent annual inflation in May. "It was slightly weaker on CPI, but not too much outside expectations, we've been living with weak CPI numbers for a while ... At some point the Bank of Canada is going to have to address the weakness in CPI," said Mark Chandler, head of fixed income and currency strategy at RBC Capital. Overnight index swaps, which trade based on expectations for the central bank's key policy rate, fell after the data, with some investors betting a Bank of Canada rate hike will now come later than previously expected. At 9:12 a.m. (1312 GMT), the Canadian dollar was trading at C$1.0456 versus the U.S. dollar, or 95.64 U.S. cents. Earlier, it sank as low as C$1.0488, or 95.35 U.S. cents, a drop of nearly a cent from its level just before the CPI figures were released. It was also well off Thursday's finish of C$1.0373, or 96.40 U.S. cents. The Canadian dollar, which was the weakest performer among major currencies, has lost some 2.5 percent since U.S. Federal Reserve Chairman Ben Bernanke said on Wednesday that the U.S. economy was growing strongly enough for it to begin slowing the pace of its bond-buying stimulus program later this year. "We'd always looked for the currency to be at C$1.05 or so by the end of the summer, and to be fair this most recent push really wasn't related too much on the Canada side, more obviously on U.S. dollar strength," Chandler said. "Today we're plumbing the depths of the league tables if you like ... and today's data was a factor." Separately, the value of Canadian retail sales for April also missed forecasts, inching up 0.1 percent from March, though economists noted that volumes showed strength. Canada's two-year bond was up 2 Canadian cents to yield 1.181 percent, while the benchmark 10-year bond dipped 3 Canadian cents to yield 2.333 percent, holding near highs not seen since late in 2011.