* C$ closes at C$0.9491 to the U.S. dollar, or $1.0536
* C$ hit highest level since November 2007 on Thursday
* Tame June inflation data cools rate hike expectations
* Bond prices boosted by inflation data (Updates details, adds comments)
By Solarina Ho
TORONTO, July 22 (Reuters) - Canada's dollar finished lower against the greenback on Friday after Canadian inflation data for June came in surprisingly tamely, trimming expectations that interest rates will rise later this year.
Canadian inflation slowed to 3.1 percent in June from an eight-year high of 3.7 percent in May, although it was still a notch above the central bank's 1-3 percent target range. [ID:nN1E76L02X]
Core inflation, which excludes volatile items such as gasoline, unexpectedly fell to 1.3 percent in June from 1.8 percent in May.
"We thought things were getting a little bit more heated up for an interest rate hike sooner here in Canada and now after today's release, we're definitely looking the other way and saying a little bit later than sooner," said C.J. Gavsie, managing director of foreign exchange sales at BMO Capital Markets.
Both measures of the consumer price index dropped to the lowest year-on-year rate since February and were lower than forecast by any of the 19 analysts in a Reuters poll.
Following the release of stronger-than-expected May retail sales data on Friday morning, the Canadian currency CAD=D4 briefly pared losses made after the release of the inflation figures. But it returned to weaker levels as the CPI data dominated the market. [ID:nN1E76L00W]
"The retail sales number was a good number but it's not going to drive the Bank of Canada to raise rates in and of itself," said Shane Enright, executive director, foreign exchange sales, at CIBC World Markets.
The currency finished the session at C$0.9491 to the U.S. dollar, or $1.0536, down from Thursday's close of C$0.9454, or $1.0578.
"We've fallen right back to anchor right around the C$0.95 region. The story is clearly yesterday and earlier in the week," Gavsie said.
"The retail sales number definitely looks a bit more promising, but CPI plays more of an impact here. I'd say we're now looking at an October-December time frame before we see the hike coming in."
The Canadian dollar climbed to a 3-1/2 year high on Thursday, spurred by market perceptions of a more hawkish tone in Bank of Canada statements earlier in the week, as well as optimism that progress was being made by euro zone leaders to keep the sovereign debt crisis contained.
Looking ahead, uncertainty over the fate of the U.S. debt ceiling and the possibility of a U.S. debt default remained on the radar.
"Markets are still going to be somewhat apprehensive," said Gavsie, who said he expected the Canadian dollar to trade between C$0.95 and C$0.96 in the near term.
Canadian government bond prices were higher across the curve, reflecting the lower probability of a rate hike this year after the inflation figures suggested interest rates could come at a more leisurely pace.
The two-year bond CA2YT=RR, particularly sensitive to short-term interest rates expectations, climbed 6.5 Canadian cents to yield 1.522 percent.
The 10-year bond CA10YT=RR advanced 63 Canadian cents to yield 2.930 percent.
A Reuters poll on Wednesday showed most of Canada's primary dealers expected the Bank of Canada to raise interest rates in September or October. <CA/POLL> [ID:nN1E76J0N0] (Additional reporting by Ka Yan Ng; editing by Peter Galloway)