* C$ hits C$0.9928 vs US$, or $1.0073 * Lowest level since Aug. 24 * Soft Canadian inflation data limits chance of rate rise * Currency set for more than 1 pct decline on week By Claire Sibonney TORONTO, Oct 19 (Reuters) - The Canadian dollar fell to its weakest level against the U.S. currency in nearly two months on Friday, hit by soft domestic inflation data and renewed worries about corporate profits. Prices in Canada remained tame in September with inflation at 1.2 percent, unchanged from August. The absence of inflation pressure could set the stage for the Bank of Canada to ease its hawkish bias when it holds its next policy meeting on Tuesday. "A lot of traders were readjusting their expectations this morning," said Mark Frey, chief market strategist at Cambridge Mercantile Group, in Victoria, British Columbia. Higher interest rates tend to help a country's currency appreciate because they often attract international capital flows and vice versa. Canada's risk-related currency was also vulnerable to the perceived lack of progress on a Spanish bailout request, which reminded investors of the headwinds facing the global economy. "Today's data aside, the overall macro environment and risk with respect to equities and commodities is what drives the Canadian dollar nine days out of 10," added Frey. At 2:20 p.m. (1820 GMT) the Canadian dollar was trading at C$0.9928 to the greenback, or $1.0073, compared with C$0.9849, or $1.0153, at Thursday's North American close. The currency hit an intraday low of C$0.9939, or $1.0061, its weakest level since Aug. 24, a day after sliding on a host of negative factors including softer equity and commodity markets. The next significant support levels for the Canadian dollar were seen around C$0.9960 and parity. The Canadian dollar has fallen more than 1 percent this week, underperforming other major currencies after Bank of Canada Governor Mark Carney omitted previous language on possible interest rate hikes in a speech he gave on Monday. Carney did say that the central bank would take whatever action is necessary to keep the 2 percent inflation target and acknowledged the effect global uncertainty was having on Canada's resource-linked economy. "The (inflation) report should weigh towards a softer dollar, given the implications for the Bank of Canada," said Sal Guatieri, senior economist at BMO Capital Markets. Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the inflation data traders slightly increased their small bets on a rate cut in the coming year. A Reuters poll released on Thursday suggested the central bank will postpone interest rate hikes until the fourth quarter of next year and will likely water down, rather than eliminate, its hawkish language. Declines in the price of oil, gold and copper also weighed on the commodity-linked currency, while a handful of disappointing U.S. earnings reports added to the pessimistic tone. Tech giants Microsoft and Google issued lackluster earnings on Thursday, while General Electric reported revenue early on Friday that fell short of expectations. Canadian government bond prices rallied on renewed demand for safe-have assets, mimicking U.S. Treasuries. The rate-sensitive two-year bond outperformed its U.S. counterpart, rising 9 Canadian cents to yield 1.085. The benchmark 10-year bond added 16 Canadian cents to yield 1.894 percent.