The Canadian dollar weakened against its US counterpart on Friday, giving up much of this week's gains after domestic data showing a surprise decline in retail sales revived bets for a Bank of Canada interest rate cut next year.

Canadian retail sales dropped by 1.2% in October, including lower sales of motor vehicles and parts, Statistics Canada said. Analysts had forecast a 0.5% increase.

At 2:34 p.m. (1934 GMT), the Canadian dollar was trading 0.3% lower at 1.3159 to the greenback, or 75.99 US cents. The currency, which notched on Wednesday a seven-week high at 1.3103, traded in a range of 1.3123 to 1.3181.

For the week, the loonie was up 0.1% after a boost from data showing higher Canadian underlying inflation and a trade deal between the United States and China.

Canadian government bond prices were higher across the yield curve, with the two-year up 6.5 Canadian cents to yield 1.662% and the 10-year rising 36 Canadian cents to yield 1.620%.

The gap between Canada's 10-year yield and its US counterpart widened by 5.2 basis points to a spread of 29.9 basis points in favor of the US bond.

"With the exception of housing markets, Canadian economic releases in the past few weeks have been unambiguously negative," Omar Abdelrahman, an economist at TD Economics, said in a note. "This one is no different. As a result, we are expecting a continued tepid performance for the Canadian economy in the fourth quarter."

Chances of a rate cut over the coming year, which had dwindled in recent weeks, jumped to nearly 50% from about 25% before the retail sales report, the overnight index swaps market indicated.

Separate data showed that new-home prices fell 0.1% in November after rising 0.1% in October. Canada is a major exporter of commodities, including oil, so its economy could benefit from an improved outlook for global trade.