CANADA FX DEBT-C$ slides to 4-month low as Europe fears drag

* 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."	
    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.