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* Ends at C$0.9865 to US$, or $1.0137
* C$ weakens briefly after soft factory data
* Bond prices mixed
By Alastair Sharp
TORONTO, Dec 14 (Reuters) - The Canadian dollar weakened slightly against its U.S. counterpart on Friday, as hopes faded that a U.S. 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 U.S. 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 U.S. 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 U.S. 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.
The currency briefly weakened to a session low after the numbers, before returning to trade little changed.
"We did have a pretty soft manufacturing report, but it really did very little to weaken off the currency," said Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets.
Canadian government bond prices were mixed, with longer-dated debt rising and short-to-medium term bonds slipping. The two-year bond lost 2 Canadian cents to yield 1.13 percent, and the benchmark 10-year bond added 5 cents to yield 1.794 percent.
Markets were also digesting data that showed U.S. consumer prices fell in November for the first time in six months, pointing to muted inflation pressures that should allow the Federal Reserve to stay on its ultra-easy monetary policy path as it nurses the economy back to health.