* Near session low of C$1.0227 vs US$, or 97.78 U.S. cents * Hits lowest level since Jan. 16 * Bond prices track U.S. Treasuries lower * Canada annualized inflation rate hits 2.0 pct in April By Claire Sibonney TORONTO, May 18 (Reuters) - The Canadian dollar weakened to a four-month low against the U.S. currency on Friday, shrugging off surprisingly high domestic inflation data to fall for a fifth straight day, as investors focused on Europe's escalating debt crisis. The move tracked broader risk aversion as overseas stocks erased this year's gains a day after Moody's cut its rating on Spanish banks en masse, heightening fears of contagion from the Greek political crisis. "The lack of sustained response to the stronger-than-expected inflation speaks to a universal focus on all things euro zone," said David Tulk, chief Canada macro strategist at TD Securities. The move lower in the Canadian dollar tracked the performance of U.S. equities, which also lost ground on Friday after Facebook Inc stumbled in its market debut. Looking ahead, investors will pay attention to an emergency meeting of G8 leaders on the weekend, ahead of a market holiday in Canada on Monday. "We'll see if there are any headlines over the weekend but we don't have a tremendous amount of optimism for any cathartic rally," added Tulk. At 2:13 p.m. (1813 GMT), the Canadian dollar stood at C$1.0218 versus the U.S. dollar, or 97.87 U.S. cents, down from Thursday's North American session close at C$1.0191 versus the U.S. dollar, or 98.13 U.S. cents. Overnight, the currency dropped as low as C$1.0227, or 97.78 U.S. cents, its weakest since Jan. 16. Jeremy Stretch, head of currency strategy at CIBC in London, saw the next near-term support level for the Canadian currency around C$1.0280. He noted that the Canadian dollar must close substantially below C$1.0140 versus the U.S. dollar in order "to see any significant potential sea change in sentiment." BRIEF INFLATION BOOST Earlier in the session, the Canadian dollar had briefly benefited from the domestic data which showed that on an annual basis, the overall inflation rate rose to 2.0 percent in April from 1.9 percent in March. The report provided the Bank of Canada with more reason, if the European crisis doesn't undermine the economy, to launch the interest-rate hike it has hinted at recently. Following the release, traders raised bets on an interest rate increase by the Bank of Canada later this year. But they soon reversed them as the global market situation worsened. "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. Canadian government bonds prices were mostly lower across the curve, taking their cue from easing U.S. Treasury prices. The Canadian bond market closed at 1 p.m. (1700 GMT) ahead of the long weekend. Canada's two-year Canadian government bond was down half a Canadian cent to yield 1.219 percent, while the benchmark 10-year bond was down 15 Canadian cents to yield 1.897 percent.