* C$ at C$1.0120 vs US$, or 98.81 U.S. cents
* Touches session-high C$1.01 after CPI jump
* Inflation above central bank's comfort zone
* Bond prices fall, Canada underperforms
By Andrea Hopkins
TORONTO, Oct 21 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart in early trade on Friday after Canadian inflation came in above expectations, slashing already slim odds that the central bank will cut interest rates.
While near-term pressures including the debt crisis in Europe are expected to keep the Bank of Canada from tightening until at least next year, the unexpectedly strong rise in consumer prices in September all but erased the chances the Bank will soon trim official interest rates to support growth.
"This reduces any expectation of a near-term cut, so that's providing support for the Canadian dollar," said Paul Ferley, assistant chief economist at Royal Bank of Canada.
"(There was) certainly more inflation pressure than expected going into the report. It was evident both in overall and core -- from a policy point of view the increase in core has got to be of the greatest concern, with the measure now moving slightly above the mid-point of the Bank of Canada's target range."
The Canadian dollar CAD=D3 climbed to a session high C$1.01 to the U.S. dollar, or 99.01 U.S. cents, in the first 30 minutes after the data was released, well above Thursday's North American session close at C$1.0150, or 98.52 U.S cents.
At 7:46 a.m. (1146 GMT), it had eased back slightly to C$1.0120 to the U.S. dollar, or 98.81 U.S. cents.
The data showed Canada's annual core inflation rate jumped in September to its highest level since December 2008. The core rate sped up more than expected to 2.2 percent from 1.9 percent in August. Analysts had forecast a 1.9 percent rate.
Higher gasoline and food prices pushed up the overall consumer price index up by 3.2 percent from a year earlier, a notch above market forecasts. [ID:nN1E79K02G]
"The jump in the core index is quite surprising. It's quite a large increase for the second straight month," said Sal Guatieri, senior economist at BMO Capital Markets.
"On the surface, to the extent it reduces expectations of a Bank rate cut, it's positive for the Canadian dollar."
Still, Guatieri said the jump in inflation pressure is not enough to suggest the Bank will raise interest rates, given the worries about the global economic environment.
Europe's long-running debt saga was meant to be resolved at a meeting of regional leaders on Sunday, but disagreement over the make-up of the sovereign rescue fund, the EFSF, stalled talks and sparked a selloff in riskier assets on Thursday.
Stocks clawed back some ground on Friday after France and Germany said a comprehensive euro zone debt deal was on its way, if a little late, although a subdued euro and choppy German bonds showed not everyone was convinced. [MKTS/GLOB]
Canadian government bond prices fell on the inflation data and underperformed U.S. Treasuries. CABONEA
The yield on the two-year Canadian government bond CA2YT=RR, which is especially sensitive to Bank of Canada interest rate moves, rose to 1.068 percent from 1.043 percent just before the release. <0#CABMK=>
The 10-year bond CA10YT=RR fell 32 Canadian cents to yield 2.349 percent. (Editing by Jeffrey Hodgson)