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* C$ at C$1.0334 vs US$, or 96.77 U.S. cents * Canadian bond prices rise across the curve By Leah Schnurr TORONTO, Oct 16 (Reuters) - The Canadian dollar strengthened to its highest level in a week on Wednesday as U.S. Senate leaders announced a last-minute deal to raise the government's borrowing limit that would avoid a potential debt default. The deal would also reopen the U.S. government after a partial shutdown that began at the start of the month when politicians failed to reach a budget agreement. Even so, the plan, which needs approval by both the Senate and the House of Representatives, only offers a temporary solution that could lead to another fiscal showdown early next year. The down-to-the-wire nature of the negotiations was reminiscent of the debt ceiling debate in 2011 when a deal was also reached at the last minute. Investors had speculated an agreement would also be forthcoming this time around, and markets reacted positively to the deal. "That's what people want to see, (things) back on track," said Don Mikolich, executive director of foreign exchange sales at CIBC World Markets in Toronto. "Start to get some economic data out, the government functioning -- things that are good for growth instead of causing this delay and uncertainty." The United States is Canada's largest export market and the prospect of slowing growth there weighed on the loonie. The Canadian dollar ended the session at C$1.0334 versus the U.S. dollar, or 96.77 U.S. cents, stronger than Tuesday's close at C$1.0380, or 96.34 U.S. cents. The loonie touched a session high of C$1.0327. Once the dust has cleared from the fiscal standoff, the market's attention will return to when the Federal Reserve will start to reduce the scale of its economic stimulus. The release of a backlog of U.S. data that was postponed by the shutdown will be key to assessing the Fed's likely path. "People had forgotten about the Fed and tapering somewhere in all this," said Mikolich. "That's the next little bit of uncertainty, the market doesn't actually know what's next on the monetary side of things." Domestically, data showed Canadian manufacturing sales unexpectedly fell in August, likely dampening economic growth in the month. Government bond prices were higher across the maturity curve. The two-year bond rose 5 Canadian cents to yield 1.209 percent, while the benchmark 10-year bond gained 25 Canadian cents to yield 2.618 percent. But Canadian treasury bills and government bonds underperformed their U.S. counterparts, which rallied on news of a deal. The spread between what Canadian and U.S. one-year T-bills yield widened to 89 basis points from 86 basis points on Tuesday, as investors demanded more of a premium to lend to Canada.