* C$ at C$1.0325 vs US$, or 96.85 U.S. cents
* Investors wary as U.S. federal government in partial
shutdown
* Bank of Canada sees 2-2.5 pct annualized growth in Q3 and
Q4
* Bond prices mostly lower across the curve
By Leah Schnurr
TORONTO, Oct 1 (Reuters) - The Canadian dollar weakened on
Tuesday after the Bank of Canada cut its third-quarter economic
growth forecast and as a partial government shutdown began in
the United States, the first in 17 years.
The Bank of Canada's Senior Deputy Governor Tiff Macklem
said the central bank now expects annualized growth in the third
and fourth quarters to be in the 2 percent to 2.5 percent range
before strengthening next year.
The outlook points to interest rates remaining low. The
central bank has held rates unchanged at 1 percent since
September 2010.
"We're definitely at a point where exports aren't developing
and growing at the rate the Bank of Canada would like," said
Scott Smith, senior market analyst at Cambridge Mercantile Group
in Calgary.
"What's really happened today is we got confirmation from
the Bank of Canada that they will be on hold for longer than I
think the markets had anticipated," he said.
Adding to investor unease was a partial government shutdown
south of the border as U.S. federal agencies were directed to
cut back services after lawmakers could not break a political
stalemate to keep government operations funded.
Investors are concerned about the impact such a shutdown
could have on the still-fragile U.S. economic recovery. The
uncertainty pushed the greenback down 0.1 percent against a
basket of currencies.
While the markets may be able to shrug off a shutdown that
lasts only a couple of days, analysts say a closure that drags
on longer than that will start to bite into growth in the United
States, Canada's biggest trading partner.
The Canadian dollar ended the session at C$1.0325,
or 96.85 U.S. cents, weaker than Monday's close of C$1.0303, or
97.06 U.S. cents.
The shutdown also cast uncertainty on two other points of
focus for markets: the looming deadline to raise the U.S. debt
ceiling and the potential path of the Federal Reserve's economic
stimulus program.
The next big political battle lawmakers face is raising the
$16.7 trillion debt ceiling by mid-October. Failure to do so
would force the United States to default on some payment
obligations and Tuesday's government shutdown stoked concerns
about U.S. politicians' ability to come to any agreement.
While the political wrangling has shifted some attention
away from monetary policy, analysts were also trying to gauge
what impact a drawn-out shutdown could have on the Fed's current
efforts to prop up the economy.
The U.S. central bank surprised markets last month by
holding the pace of its $85 billion a month in bond purchases
steady. Given the uncertainty over fiscal policy, the Fed is
unlikely to announce a reduction in purchases at its next
meeting later this month, Smith added.
"October at this point is definitely off the table and we're
looking toward at least December, maybe even January 2014 now,"
Smith said. "Had the Fed moved to taper in September, we might
be getting more of a shock than we are in the markets."
The loonie for now is likely to trade in a range between the
high C$1.03 level and the mid-C$1.02 area, he said.
Prices for Canadian government bonds were mostly lower
across the maturity curve. The two-year bond was down
half a Canadian cent to yield 1.195 percent and the benchmark
10-year bond slipped 6 Canadian cents to yield 2.551
percent.
