* C$ falls to 96.48 U.S. cents
* U.S. retail sales had risen for seven straight months
* Bond prices rise following a slump in recent days (Adds details, updates currency and bond prices)
By John McCrank
TORONTO, June 11 (Reuters) - Canada's dollar fell against the greenback on Friday morning after a weaker-than-expected retail sales report in the United States, which consumes around three-quarters of Canadian exports.
U.S. retail sales, which had risen for seven straight months, fell unexpectedly in May due to a record drop in building materials purchases, which added to fears the economic recovery may be losing some steam. [ID:nN11109609]
Total retail sales dropped 1.2 percent, versus forecasts of 0.2 percent growth.
"The soft U.S. retail sales report might flag a softening of Canadian exports to the U.S., if the U.S. consumer is indeed flagging," said Sal Guatieri, a senior economist at the BMO Capital Markets.
At 9:30 a.m., the Canadian dollar was at C$1.0368 to the U.S. dollar, or 96.45 U.S. cents, compared with Thursday's North American finish of C$1.0312 to the U.S. dollar, or 96.97 U.S. cents.
The price of U.S. crude oil tumbled after the retail sales report from the world's No. 1 energy user to around $74 a barrel from $75. [O/R]
Canada is the biggest oil supplier to the United States, and its currency is often influenced by moves in oil prices.
U.S. and Canadian stock markets opened lower on Friday.
Despite the pullback, the Canadian dollar was up around 2.3 percent this week as investors' fears over the sovereign debt situation in Europe eased.
"For the moment, the market still seems to be pretty positive on risk (coming out of Europe) relative to where it was three or four days ago," said Shane Enright, a currency strategist at CIBC World Markets.
He pointed out that Italy just carried out a successful bond auction, following debt sales in Belgium, Portugal and Spain in recent days, all of which all saw good demand.
On the domestic data front, Canadian industrial capacity surged in the first quarter, posting a record 2.9 percent jump from the previous quarter. [ID:nN11107657]
The report, which is not normally seen as a market mover, could end up supporting the Canadian currency, said BMO's Guatieri.
"It rose more than expected, which suggests the output gap might be closing a little faster than the Bank of Canada anticipated, which of course, argues for further tightening (of interest rates)," he said.
The central bank raised its key interest rate from a record low earlier this month. It was the first monetary policy tightening by a G7 country since the economic downturn.
CANADIAN BONDS EXTEND GAINS
Canadian bond prices were higher at the long end on a safe-haven rally, but unwound some of the gains they made immediately following the U.S. data. Prices had fallen in recent days as investor became less risk averse.
The two-year government bond CA2YT=RR was flat, yielding 1.817 percent, while the 10-year bond CA10YT=RR rose 20 Canadian cents to yield 3.410 percent. (Editing by Jeffrey Hodgson; editing by Peter Galloway)