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CANADA FX DEBT-C$ lower, but rise in inflation rate stems decline

* Canadian dollar at C$1.1150 or 89.69 U.S. cents * Bond prices lower across the maturity curve By Leah Schnurr TORONTO, Feb 21 (Reuters) - The Canadian dollar touched a three-week low against the greenback on Friday, extending its recent sell-off even as a stronger-than-expected increase in the domestic inflation rate helped the currency cut some declines.

The closely watched report showed the annual inflation rate unexpectedly jumped to 1.5 percent last month. Analysts said the report reduced the likelihood of an interest rate cut by the Bank of Canada, which has flagged its concerns about a weak inflation environment.

Overnight index swaps, which trade based on expectations for the central bank's policy rate, showed traders pared back their already small bets on a rate cut in 2014 after the inflation report was released.

Still, the report was not enough to completely reverse the Canadian dollar's weaker direction, as investors also took in separate data that showed retail sales slumped in December.

The loonie was down for the third session in a row, giving back gains the currency had made in February so far. Analysts said a variety of factors were pressuring the Canadian dollar on Friday, including strength in the U.S. dollar as well as some soft economic data seen this week.

"The main reason why the Canadian dollar is weak is not really about just the Bank of Canada, but rather what is happening globally," said Benjamin Tal, senior economist at CIBC World Markets in Toronto.

"We got some soft numbers lately from the U.S. and China and that's something that always have a negative impact on the Canadian dollar." The Canadian dollar was at C$1.1150 to the greenback, or 89.69 U.S. cents, weaker than Thursday's close of C$1.1099, or 90.10 U.S. cents. The currency earlier touched a session low of C$1.1196, putting it within reach of a 4-1/2-year low.

Recent U.S. economic data has been mixed, though analysts have pointed to the harsh winter weather as the culprit for the softness in some indicators. Other data earlier in the week showed a continuing contraction in China's manufacturing sector, while Canada's wholesale trade numbers disappointed.

"Today we're in the context of a broadly stronger U.S. dollar and then we've had Canada dollar positive data from CPI, so we could still see that the Canadian dollar doesn't strengthen as much as it would on a day where we were in an environment of broad U.S. dollar weakness," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

Canadian government bond prices were lower across the maturity curve, with the two-year down 2-1/2 Canadian cents to yield 1.017 percent and the benchmark 10-year down 11.7 Canadian cents to yield 2.452 percent.