* Canadian dollar falls 0.2% against the greenback * Canadian retail sales fall 0.1% in May * U.S. oil futures increase by 0.5% * Canada-U.S. 2-year spread widens by 2.7 basis points By Levent Uslu TORONTO, July 19 (Reuters) - The Canadian dollar fell to a nine-day low against its broadly stronger U.S. counterpart on Friday as domestic data showing a surprise decline in May retail sales raised bets that the Bank of Canada would cut interest rates this year. The value of Canadian retail trade dipped by 0.1% versus an estimated 0.3% increase, the first decline in four months, as bad weather hit sales of food and drink, Statistics Canada data indicated. Chances of a Bank of Canada interest rate cut by December climbed to 57% from about 50% before the data, the overnight index swaps market indicated. At 9:53 a.m. (1353 GMT), the Canadian dollar was trading 0.2% lower at 1.3072 to the greenback, or 76.50 U.S. cents. The currency hit its weakest since July 10 at 1.3110. Earlier in the day, the loonie had hit its strongest level in nearly nine months at 1.3016 but was then pressured by a rally in the U.S. dollar and the weaker-than-expected domestic data. The U.S. dollar rebounded against a basket of major currencies after declining the previous day, as increased bets for a European Central Bank interest rate cut as early as next week pressured the euro. The Canadian dollar lost ground on Friday even as the price of oil, one of Canada's major exports, rose. U.S. crude oil futures were up 0.5% at $55.60 a barrel as tensions spiked again in the Middle East after the United States said it had destroyed an Iranian drone in the Strait of Hormuz. Canadian government bond prices were mixed across the yield curve, with the two-year up 0.5 Canadian cent to yield 1.451% and the 10-year falling 4 Canadian cents to yield 1.504%. The 10-year yield touched its lowest intraday since July 5 at 1.485%, while the gap between Canada's 2-year yield and its U.S. equivalent widened by 2.7 basis points to a spread of 35.0 basis points in favor of the U.S. bond. (Reporting by Levent Uslu; additional reporting by Fergal Smith; editing by Jonathan Oatis)
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