CANADA FX DEBT-Loonie weakens as U.S. gov't remains closed

Reuters

* C$ at C$1.0332 vs US$, or 96.79 U.S. cents

* Day 2 of U.S. government shutdown spurs investor unease

* Bond prices higher across curve

By Leah Schnurr

TORONTO, Oct 2 (Reuters) - The Canadian dollar weakened

against the greenback on Wednesday as a government shutdown in

the United States continued for a second day with few signs

lawmakers were making any progress.

The political stalemate south of the border has prompted the

first U.S. federal government shutdown in 17 years, forcing

hundreds of thousands of employees to take unpaid leave, and

investors were concerned about what impact the impasse will have

on the still-fragile economic recovery.

Congressional leaders were scheduled to meet with President

Barack Obama later on Wednesday, though both sides said the

meeting was unlikely to end the shutdown.

Analysts said a shutdown that drags on longer than a few

days will start to bite into economic growth in the United

States, Canada's biggest trading partner.

"The longer this goes on, the weaker the U.S. economy is

going to end up being, and that's going to weigh on Canada as

well," said Benjamin Reitzes, senior economist and foreign

exchange strategist at BMO Capital Markets in Toronto.

The Canadian dollar ended the session at C$1.0332,

or 96.79 U.S. cents, weaker than Tuesday's close of C$1.0325, or

96.85 U.S. cents.

For the most part, the loonie has been trading in a range

since early September and analysts expect that to continue for

now.

"That C$1.03 range that we're sitting in right now arguably

looks like it's a limbo zone," said Ian Pollick, fixed income

strategist at RBC Capital Markets in Toronto. "A lot of people

are expecting that the shutdown isn't going to last too long."

Still, the shutdown cast uncertainty on two other points of

focus for markets: the looming deadline to raise the U.S. debt

ceiling and what influence that could have on central bank

policy.

The next big political battle lawmakers face is raising the

$16.7 trillion U.S. debt ceiling by mid-October. Failure to do

so would force the United States to default on some payment

obligations, and the inability of U.S. politicians to end the

government shutdown has stoked concerns about their ability to

come to an agreement on debt.

While the political wrangling has shifted some attention

away from monetary policy, analysts were also trying to gauge

what impact a lengthy shutdown might have on the U.S. Federal

Reserve's efforts to prop up the economy.

The central bank surprised markets last month by maintaining

the amount of assets it is buying in its stimulus program at $85

billion a month. Analysts were speculating that the fiscal drag

on the economy spurred by the shutdown could prevent the Fed

from reducing its bond purchases as soon as had been expected.

In a speech that did not touch on the outlook for the U.S.

economy or monetary policy, Fed Chairman Ben Bernanke said on

Wednesday the Fed is being careful not to place too great a

burden on smaller banks as it seeks to beef up regulation of the

financial system.

Separately, Boston Fed President Eric Rosengren said the

shutdown could delay the Fed's withdrawal of bond purchases

because the government is not producing official data on the

economy.

Prices for Canadian government bonds were higher across the

maturity curve. The two-year bond was up 2.8 Canadian

cents to yield 1.186 percent and the benchmark 10-year bond

added 11 Canadian cents to yield 2.548 percent.

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