* C$ ends at C$1.0291 vs US$, or 97.17 U.S. cents * Weak Canadian inflation means no rate hike on horizon * US$ strengthens near 10-mth high on Fed QE debate * Bond prices mixed By Andrea Hopkins TORONTO, May 17 (Reuters) - The Canadian dollar closed weaker against its U.S. counterpart on Friday after touching its softest level in more than two months on inflation data that was both far below expectations and well off the Bank of Canada's target range. Annual inflation fell in April to 0.4 percent from 1.0 percent in March, its lowest level since the 0.1 percent hit in October 2009 and far below the central bank's target range of 1 to 3 percent. Analysts had expected no change from March to April. The data pushed the Canadian dollar to a session low C$1.0313, or 96.96 U.S. cents, its weakest point since March 8 and well below Thursday's North American session close at C$1.0192, or 98.12 U.S. cents. It recovered some ground later to finish the day at C$1.0291 versus the U.S. dollar, or 97.17 U.S. cents, ending a two-month rally that had taken the currency close to parity, as high as C$1.0014, or 99.86 U.S. cents, a week ago. "When we get key data we often revert back to pre-data levels, which is basically what we did," said David Bradley, director of foreign exchange trading at Scotiabank. "Now as we get close to the end of the day, we're grinding back up towards the C$1.03 level, and I think over the next couple of weeks we're going to see more weakness in dollar-Canada, probably a test of the C$1.04 level," he said. Bradley said the U.S. dollar is gaining broad strength and commodity-linked currencies weakening. The dollar soared on against major currencies on growing speculation that the Federal Reserve could soon begin to rein in its asset-buying program and after data showed U.S. consumer sentiment hit an almost six-year high in early May. The Canadian inflation data reinforced expectations that the Bank of Canada will not be raising interest rates any time soon. Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the announcement, traders cut their expectations of an interest rate hike later this year. "The currency was vulnerable already, heading into these numbers. It was clearly on its back foot in any event, and to have a lower-than-expected reading on CPI right across the board, it just knocked whatever support there was for the currency out from under it," said Doug Porter, chief economist at BMO Capital Markets. "This is outside of its recent range. (The future direction) probably depends more on the broader U.S. dollar story, but at least for a spell we could be probing some new lows for the currency." The price of Canadian government debt were mixed, with gains on the short end. The 2-year bond was down 0.1 Canadian cent to yield 1.010 percent, while the benchmark 10-year bond fell 37 Canadian cents to yield 1.927 percent.