The loonie was down 0.17 of a cent to 98.7 cents US after inflation fell 0.6 per cent from November to an annualized rate of just 2.3 per cent.
Analysts had expected prices to cool in December due to Christmas season sales, but not by this much. The consensus was for a 0.4 per cent falloff.
Analysts noted that a major contributor to the decline was a 2.3 per cent drop in motor vehicle prices as manufacturers offered discounts on 2012 models.
There were also sizable drops in clothing, home entertainment equipment and household furnishings.
Lower commodity prices also weighed on the dollar.
Oil prices continued to lose ground as signs of economic improvement in the U.S. and Europe were tempered by a rise in gasoline stocks, which suggests weaker demand for crude.
The February crude contract on the New York Mercantile Exchange dropped $1.93 to US$98.46 a barrel.
Metal prices also backed away with March copper down five cents to US$3.75 a pound, almost reversing Thursday's five-cent gain.
But prices for the metal, viewed as an economic bellwether because it is used in so many businesses, have jumped about three per cent this week after Chinese growth for the fourth quarter came in better than expected. China is the world's biggest consumer of copper.
But prices gave up some ground Friday after HSBC’s Flash China Manufacturing Purchasing Managers Index reading for January came in at 48.8.
That is up slightly on the final reading from December of 48.7 but a reading below 50 still signals contraction.
And the February gold contract on the Nymex gained $9.50 to US$1,664 an ounce.
Traders also kept an eye on debt-reduction talks between Greece and its private creditors that could determine whether Europe’s debt crisis flares up again.
Prime Minister Lucas Papademos met for a third day with negotiators from the Institute of International Finance, which represents the private creditors who are being asked to take a loss on their bondholdings to lighten Greece’s debt load by €100 billion.
An agreement is needed if Greece is to get the next batch of bailout cash that would prevent a devastating debt default — Greece does not have enough money to cover a €14.5 billion bond repayment in March.