TREASURIES-Benchmark yields fall to near 2-week low on weak U.S. inflation data

* 10-year yields fall to lowest level since Aug. 1

* Retail sales, producer price data miss expectations

* Investors reduce expectations for Fed rate hike

* Yield decline exacerbated by fall in dollar vs yen

(Updates to afternoon trading)

By Dion Rabouin

NEW YORK, Aug 12 (Reuters) - Benchmark U.S (Other OTC: UBGXF - news) . Treasury yields

fell to their lowest level in nearly two weeks on Friday after

weaker-than-expected readings on U.S. retail sales and producer

prices suggested U.S. inflation could be slowing, cutting

expectations for the Federal Reserve to raise overnight interest

rates.

Retail sales were flat for July, missing economists'

expectations for a modest 0.4 percent rise, and producer prices

recorded their biggest drop in nearly a year last month on

declining costs for services and energy products.

"The relationship is pretty straightforward, with low

inflation and low growth comes lower interest rates," said Guy

LeBas, chief fixed income strategist at Janney Montgomery Scott

LLC in Philadelphia.

Fed fund futures prices on Friday showed investors reduced

their bets that the Fed would tighten monetary policy before the

end of the year. Traders see a 43 percent chance of a rate hike

by the Fed's December meeting, versus a 52 percent chance on

Thursday, according to CME Group (Kuala Lumpur: 7018.KL - news) 's FedWatch tool.

Yields on benchmark 10-year Treasury notes fell

to their lowest level since Aug. 1 after the data, at 1.48

percent. The 30-year Treasury bond hit its lowest

yield since Aug. 5, at 2.21 percent.

The 10-year note was last up 16/32 in price for a yield of

1.52 percent, down more than 5 basis points from its late

Thursday close. The 30-year Treasury bond rose 1-4/32 in price

to yield 2.24 percent, about 5 basis points lower than

Thursday's close.

The move lower in yield following the data's release was

exaggerated by buying of the Japanese yen, LeBas said.

Longer-dated Treasury yields have moved largely in concert with

the yen in recent months, dropping as the dollar has

declined against the Japanese currency.

U.S. Treasuries have attracted more overseas investors as

government debt in other developed markets like Japan has moved

to yield negative interest rates at maturities up to 10 years.

Ten-year Japanese government bonds currently yield -0.101

percent, meaning investors lose money if they hold them to

maturity.

(Reporting by Dion Rabouin; Editing by Dan Grebler and Leslie

Adler)