* Canadian dollar weakens 0.2% against the greenback

* For the week, the loonie gains 0.1%

* Flash data shows retail sales down 0.6% in May

* Bond yields rise across the curve

TORONTO, June 21 (Reuters) - The Canadian dollar fell against its broadly stronger U.S. counterpart on Friday as preliminary domestic data showed retail sales falling in May, but the move was limited after speculators built up large short positions in the currency.

The loonie was trading 0.2% lower at 1.3710 per U.S. dollar, or 72.94 U.S. cents, after earlier touching its strongest level since June 7 at 1.3675.

For the week, the currency was up 0.2%, posting its second straight week of modest gains.

"I think one reason for the CAD's gains this week can be found in market positioning," Shaun Osborne, chief currency strategist at Scotiabank, said in a note.

"Traders and investors have been persistently bearish on the CAD in recent months but extreme CAD short positioning has often coincided with a rebound of sorts in the CAD as tired or weaker shorts cover in the absence of any additional CAD losses."

Speculators have raised their bearish bets on the currency to a record high level, recent data from the U.S. Commodity Futures Trading Commission showed..

Canadian retail sales rose 0.7% in April, matching expectations, as sales at gasoline pumps boosted the overall numbers. A flash estimate showed a drop of 0.6% in May.

"The overall trend in spending points to softness, with the three-month average growth rate barely moving into positive territory in April, then reverting back in May," Maria Solovieva, an economist at TD Economics, said in a note.

The U.S. dollar rose to a seven-week high against a basket of major currencies as the Federal Reserve's patient approach to interest-rate cuts contrasts it with more dovish peers, including the Bank of Canada.

Canadian government bond yields rose across the curve. The 10-year was up 1.2 basis points at 3.358%, after touching on Tuesday a four-and-a-half-month low at 3.258%. (Reporting by Fergal Smith; Editing by Josie Kao)