The loonie fell 1.07 cents to 95.4 cents US, its lowest level since early September 2010, amid oil prices that also fell to their lowest close in a year.
Traders also took in a report that Canada's economy continued to grow in July.
Statistics Canada reported that gross domestic product rose 0.3 per cent in July, or annualized growth of 2.3 per cent, which met economists' expectations and tended to dispel fears that the economy had stumbled back into a technical recession.
The loonie is exposed to weakness in the rest of the world, because the country's economy is heavily dependent on commodities and resources, such as oil and metals, which drop in price when global demand falters.
As Europe teeters on the brink of recession and China, the world's second-biggest economy, slows down after torrid growth in recent years, demand for industrial metals, oil and other commodities slips.
And as worries mount about the economic future, many investors and traders sink their money into the American dollar, the world's reserve currency and popular haven for the risk-averse.
That run towards the greenback undermines the loonie and can lead to big swings in the Canadian currency.
"It is impossible to ignore the accelerating weakness in the Canadian dollar; our base case remains that as long as risk aversion remains high, it is likely that the Canadian dollar will struggle," Camilla Sutton, chief currency strategist at Scotia Capital, wrote in a report.
"In order for risk aversion to drop significantly, markets will need a better solution for Europe (one that includes a framework for an orderly default for Greece, bank recapitalization and a plan to ring fence contagion)," Sutton said.
"We expect this before year-end and accordingly, believe we will see the Canadian dollar retrace some of its losses into year-end; however for now the near-term outlook continues to darken."
The U.S. greenback strengthened amid another round of doubt that European officials can find a solution to the government debt crisis and stave off a default by Greece.
There had been some relief on markets Thursday after Germany, which pays the lion's share of European bailouts, became the 13th member of the eurozone to support the expansion of the bloc's euro440 billion rescue fund.
The fund will be able to buy government bonds and lend money to banks and governments before they are in a full-blown crisis, making Europe's response to market jitters more rapid and preemptive.
In Greece, the heart of the currency zone's sovereign debt crisis, international debt inspectors were trying to complete a review of the country's austerity reforms, but strikes and protests were delaying meetings.
The stronger U.S. dollar pressured commodity prices. A rising greenback usually helps depress commodity prices, which are denominated in dollars, as it makes items like oil and copper more expensive for holders of other currencies.
The November crude contract on the New York Mercantile Exchange fell $2.94 to US$79.20 a barrel, its lowest close in a year.
The December copper contract was off another nine cents to US$3.15 a pound.
Prices for copper, widely considered a proxy for the overall economy, also slid as a survey showed that China's manufacturing remained stagnant in September due to sluggish demand both at home and abroad. China has been the world's biggest consumer of the metal.
The monthly survey by HSBC also showed prices for materials and other manufacturing inputs rising at the fastest pace in four months, which suggested sustained inflationary pressures.
The full survey followed a more pessimistic preliminary version published last week that prompted a sell-off in global markets as investors reacted to the possibility that China's robust growth might falter, further dimming the world economic outlook.
And the December bullion contract edged $5 higher to US$1,622.30 an ounce.