* C$ at C$0.9916 vs US$, or $1.0083 * German data lifts market * Soft Canadian inflation data weighs * IMF moves to boost euro zone funding * Bonds prices mostly lower By Jon Cook TORONTO, April 20 (Reuters) - Canada's dollar strengthened against its U.S. counterpart on Friday as positive developments in Europe eased concerns of an escalation of the region's debt crisis and helped the currency shrug off soft domestic inflation data. Canada's annual inflation rate dipped to 1.9 percent in March from 2.6 percent in February, largely due to slower year-over-year increases in prices for food and energy, Statistics Canada said on Friday. March's rate was slightly below the 2.0 percent forecast by market operators, who said it was unlikely to put any immediate pressure on the Bank of Canada to raise interest rates, which are currently very low. "This really shouldn't have a material impact on markets because it's mostly about a high number dropping out from a year ago that caused the year-over-year rate to see such a steep decline," said Avery Shenfeld, chief economist at CIBC World Markets. "The Bank of Canada's warning about a rate hike is more about its expectations that the economy will grow fast enough to create a potential inflation risk in 2013 rather than any immediate inflation pressures," added Avery. The Canadian dollar sagged to around C$0.9925 against the greenback, or $1.0076, a hair weaker than C$0.9912 just before the release of the report. The currency had strengthened against the greenback overnight after a better-than-expected German business sentiment survey on Friday unexpectedly climbed for the sixth month in a row in April, defying expectations for a fall. "News overnight has been a bit encouraging for risk assets," said Shaun Osborne, chief currency strategist at TD Securities. "We're seeing commodity prices, equity markets generally rally." Oil rose to $119 a barrel on Friday, trimming its decline this week and gold and metals prices were also higher as the euro firmed against the U.S. dollar. At around 9:51 a.m. (1351 GMT), the Canadian dollar was at C$0.9916 against the greenback, or $1.0083, up from its Thursday finish at C$0.9952 against the U.S. dollar, or $1.0048. Concerns about the euro zone's financial stability has pressured the Canadian currency, chipping away at sharp gains earlier in the week after the Bank of Canada surprised the market with a more bullish economic forecast and signaled it was starting to think more seriously about tightening monetary policy. The more hawkish central bank outlook has prompted several of the country's primary dealers to pull forward their forecasts for an interest rate hike, according to a Reuters poll, with the central bank now expected to tighten policy early next year. On Wednesday Governor Mark Carney said the euro zone debt crisis was "still the biggest downside risk, external downside risk" to the Canadian economy. That risk was alleviated a bit on Friday as the Group of 20 nations stood ready to commit at least $400 billion to bulk up the International Monetary Fund. Canadian government bond prices were mostly lower. The two-year bond shed 3 Canadian cents to yield 1.352 percent. The benchmark 10-year bond was down 25 Canadian cents to yield 2.076 percent.