The Canadian dollar weakened slightly against its US counterpart on Friday, as hopes faded that a US budget deal will be brokered by the end of the year. An impasse between Democrats and Republicans is raising the odds that Congress will fail to meet a year-end deadline to avert steep US tax hikes and spending cuts. Many economists believe that failure to reach a fiscal deal would push the United States - Canada's biggest trading partner - back into recession and hurt Canada's currency.

Surprisingly weak Canadian manufacturing data early in the session briefly weighed on the Canadian dollar, which was also hurt by the broadly cautious tone that hit other growth-oriented currencies and global stocks. The Canadian dollar's modest weakness "reflects the softening in equities today," said Greg Moore, foreign exchange strategist at TD Securities. "Since the Fed gave a more dovish statement on Wednesday we've seen risk assets on the back foot."

The US Federal Reserve on Wednesday tied its outlook for maintaining ultra-low interest rates to an economic threshold that includes a fall in the unemployment to at least 6.5 percent, as it also launched a fresh round of monetary stimulus. The Canadian dollar ended at C$0.9865 versus the US dollar, or $1.0137, compared with Thursday's finish at C$0.9848, or $1.0154. Moore said the Canadian currency could strengthen to roughly C$0.9750 by the end of the year if a deal is reached, while it would likely weaken if little progress is made.

For next week, he said some investor focus would turn to the Bank of Japan policy meeting, but most attention would remain on Washington. Data on Friday showed Canadian manufacturing unexpectedly plunged by 1.4 percent in October from September, the biggest drop in nine months, on weakness in major sectors such as motor vehicles and primary metals.

Copyright Reuters, 2012