The loonie fell 0.42 of a cent to 97.78 cents US after France's finance minister announced that ratings firm Standard & Poor's has cut its credit rating by a notch to AA.
France's loss of its AAA rating deals a heavy blow to the eurozone's ability to fight off its debt crisis. The country is the second-largest contributor to the currency union's bailout fund and a lower credit rating often results in higher borrowing costs.
S&P in December put 15 eurozone countries on credit watch and other downgrades were expected.
The downgrade report slammed the euro, which slid more than one per cent to trade at US$1.2679 versus $1.2826 late Thursday.
The session had started off on a positive note. Traders had been relieved at successful government bond auctions in Italy and Spain on Thursday, which had raised hopes that policy-makers may finally be getting a grip on Europe's debt crisis after months of procrastination and indecision.
On Friday, Italy had seen its borrowing costs drop for a second day in a row as it easily raised €3 billion.
Meanwhile, crucial negotiations between the Greek government and its private creditors on a bond swap deal needed to avoid default appear close to collapse. Representatives of the bondholders are saying the talks have been "paused for reflection."
The deal is known as the Private Sector Involvement and aims to reduce Greece's debt by €100 billion by swapping private creditors' bonds with new ones with a lower value.
Greece is rushing to reach a deal on the bond swap that would reduce its privately-held debt by roughly half. Without the deal, and funding from the country's second bailout, the country faces a messy default.
Negative news from Canada's biggest trading partner also pressured the loonie.
The U.S. Commerce Department said the trade deficit increased 10.4 per cent to US$47.8 billion, the highest level since June. Exports fell for a second straight month while imports rose to an all-time high, driven by rising demand for oil and foreign-made cars.
Domestic trade data came in stronger than the U.S., with Statistics Canada reporting that Canada's trade balance with the world improved dramatically in November, going from a deficit of $487 million in October to a surplus of $1.1 billion in November. The agency said exports increased 3.2 per cent, led by energy and automotive products. Imports declined 0.8 per cent.
It added that the overall decline in imports was attributable to lower imports of automotive products, as well as industrial goods and materials.
Oil prices fell in the wake of the U.S. data with the February contract in New York off 40 cents to US$98.70 a barrel.
Oil fell $1.77 Thursday amid rumours that Europe would delay its embargo of Iranian oil. Oil prices had been steadily rising amid fears of a supply crunch if a co-ordinated embargo were put in place.
The March copper contract edged one cent lower to US$3.64 a pound while February gold declined $16.90 to US$1,630.80 an ounce.