* C$ hits session high of C$1.0139 vs US$, or 98.63 U.S. cents * 2-yr bond yield climbs after stronger-than-expected inflation * Total inflation 2.0 pct annually By Claire Sibonney TORONTO, May 18 (Reuters) - The Canadian dollar bounced up from more than a four-month low against the U.S. currency on Friday as riskier assets recovered from a violent, Europe-led sell-off this week and data showed Canada's inflation rate rose more than expected in April. The country's inflation edged up to 2.0 percent, versus expectations for a 1.9 percent increase, matching the Bank of Canada's target as gasoline prices rose. Following the release, the currency firmed to C$1.0139 against the greenback, or 98.63 U.S. cents, from around C$1.0164, or 98.39 U.S. cents immediately before the data. "The number was relatively firm, if you look at where it came from it was in some of the more volatile categories ... this suggests the Bank of Canada will probably sort of look through the number," said Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets. "I don't think the market impact will be that great either, obviously because of the environment that we are in." The currency was already on stronger footing heading into the report. It recovered from a more than 3 percent drop this week to back below 98 U.S. cents on Friday, a day after Moody's cut its rating on Spanish banks en masse, heightening fears of contagion from the Greek political crisis. Following the data, traders slightly raised bets of an interest rate increase by the Bank of Canada later this year, but that probability has come down over the course of the week. "From a strictly domestic standpoint, I think it does advance the case for the bank raising rates. Having said that, the bank also has to, of course, deal with the reality of a further flare up in the European situation, and I think that's going to overwhelm domestic considerations," said Doug Porter, deputy chief economist at BMO Capital Markets. At 9:10 a.m. (1310 GMT), the Canadian dollar stood at C$1.0166 versus the U.S. dollar, or 98.37 U.S. cents, up from Thursday's North American session close at C$1.0191 versus the U.S. dollar, or 98.13 U.S. cents. Earlier, the currency dropped as low as C$1.0227, or 97.78 U.S. cents, its weakest since Jan. 16. The currency was largely following the direction of rising U.S. stock index futures after a rough week on the back of Europe's escalating debt crisis. U.S. futures edged up, but major global indexes were set up to close their worst week of the year. Facebook Inc's long-expected debut could help lift otherwise battered investor sentiment. "It felt like people were bracing themselves for financial market Armageddon," said Jeremy Stretch, head of currency strategy at CIBC in London. "There might be a little of consolidation today, but it's more of a case of looking to lock in a little bit of profit after a pretty violent week, and I think people will come back and reassess at the beginning of next week." Stretch said that the Canadian dollar must close substantially firmer than C$1.0140 versus the U.S. dollar, or 98.62 U.S. cents, in order to see a potential turn in sentiment for the domestic currency. "I don't foresee that happening even though risk is looking a little better bid at this point in the day. It's going to be tough, and I probably still prefer to be long dollar/CAD into the start of next week overall." Canadian government bonds lagged U.S. Treasuries prices at the short end of the curve and outperformed at the long end. The yield on the two-year Canadian government bond , which is especially sensitive to Bank of Canada interest rate moves, rose to 1.25 percent from 1.228 percent just before the release. Canada's 10-year yield dropped to 1.883, from around 1.891 percent.