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* C$ at C$1.0328 vs US$, or 96.82 U.S. cents * Canada's trade deficit rises to C$1.31 billion * Bond prices lower across curve By Leah Schnurr TORONTO, Oct 8 (Reuters) - The Canadian dollar weakened against the greenback on Tuesday after the trade deficit widened more than expected in August and as the government shutdown south of the border dragged on, though there were faint signs of hope for a resolution. Canada's trade deficit rose to C$1.31 billion ($1.27 billion) as imports grew to set a record. The data offset an earlier, more upbeat report that showed housing starts jumped in September. "Exports are a large part of the Canadian economy and they are really going to underpin the recovery for us," said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary. "So, if they are not progressing as fast or as well as we'd like, then we're going to see some loonie selling on the prospects moving forward for the whole economy." Because of the role it plays in the economy, the export sector is also a significant focal point for the Bank of Canada in terms of when the central bank will raise interest rates, said Smith. The Bank of Canada earlier in the month cut its third-quarter economic growth forecast and said the export sector might recover more slowly than expected. The Canadian dollar was at C$1.0328, or 96.82 U.S. cents, weaker than Monday's close of C$1.0313, or 96.96 U.S. cents. The Canadian currency briefly hit a session high of C$1.0308 shortly after the housing data. The partial government shutdown south of the border that started last week also strained markets as the impasse brought lawmakers closer to a separate and more crucial deadline to raise the U.S. debt ceiling in order to avoid default. But some hope emerged with President Barack Obama saying he would accept a short-term increase in the nation's borrowing authority to prevent a default. The United States has until mid-October before it hits the $16.7 trillion borrowing limit. The impasse was reminiscent of the 2011 showdown over the debt ceiling, which yielded an agreement only at the last minute. "With markets looking back at 2011 and saying an eleventh-hour deal was done then, expectations are we'll get something hammered out before Oct. 17," said Smith. Following a brief spike after the Federal Reserve's decision to stand pat on its economic stimulus on Sept. 18, the Canadian dollar has been trading in a tight range for several sessions. Analysts see the loonie in a range between mid-C$1.02 and mid-C$1.03 for now, baring a resolution or other catalyst. Prices for Canadian government bonds were lower across the maturity curve. The two-year bond slipped half a Canadian cent to yield 1.190 percent, while the benchmark 10-year bond fell 6 Canadian cents to yield 2.577 percent.