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TORONTO (Reuters) - The Canadian dollar ended higher against the U.S. currency on Tuesday after stronger than expected trade data reinforced the view that economic recovery is progressing steadily.
A government report showed Canada posted a larger than expected trade surplus of C$1.4 billion in February on increased exports of industrial goods and materials. Analysts had predicted Canada would run a surplus of C$600 million in February.
The trade data helped to lift the currency to its strongest level of the North American session at C$1.0007 to the U.S. dollar, or 99.93 U.S. cents, from about C$1.0031, or 99.69 U.S. cents, just before the data's release.
The data showed the Canadian economy is recovering on a broad front, said Doug Porter, deputy chief economist at BMO Capital Markets.
"It's not just domestic spending. We're also seeing net exports adding to growth. That would probably increase the confidence in the Bank of Canada that the coast is clear for them to start raising interest rates, whether the (U.S. Federal Reserve) does or not, and whether the Canadian dollar remains strong or not," he said.
"It does seem like the Canadian economy can sustain higher interest rates."
The Canadian dollar finished at C$1.0019 to the U.S. dollar, or 99.81 U.S. cents, up from Monday's close of C$1.0033 to the U.S. dollar, or 99.67 U.S. cents.
The trade figures also supported comments made by Finance Minister Jim Flaherty on Monday that the Canadian dollar's ascent against the greenback has been "relatively orderly".
"It (the trade data) was positive from an export point of view and it solidified what Flaherty was saying yesterday that it's been a very orderly appreciation of the Canadian dollar based on fundamentals," said David Bradley, director of foreign exchange trading at Scotia Capital.
Still, the currency fell short of parity with the greenback.
"The market tested parity in the wake of the upbeat trade numbers," said BMO's Porter. "It couldn't push through. It has since retreated from that point. Obviously, there's a lot of resistance at parity for the currency. It's seemingly having difficulty breaking through that threshold on a sustained basis."
On Monday, the Canadian dollar also came close to regaining parity with the U.S. dollar after key Bank of Canada surveys pointed to an upbeat business mood, enhancing the market notion that the central bank would raise interest rates at midyear.
Apart from the spike after the trade figures, the Canadian dollar had been largely drifted with changes in oil prices and as investors continued to assess news of the big European financial rescue package for Greece [ID:nLDE63A0BO], Bradley said.
In a volatile session, oil futures slipped on Tuesday to settle at $84.05 a barrel, while gold prices were also softer.
Also on Tuesday, data showed the price of new homes in Canada rose by 0.1 percent in February from January and by 0.9 percent from February 2009, slightly below market expectations.
Canadian bond prices moved lower across the curve on Tuesday as data again pointed to a reviving economy.
"The more positive data that comes out of Canada, we've seen a lot of it recently ... it's moving the Bank of Canada's likelihood of increasing rates forward," Bradley said.
The two-year government bond fell 9 Canadian cents to C$99.25 to yield 1.907 percent, while the 10-year bond dropped 22 Canadian cents to C$100.48 to yield 3.688 percent.
Canadian government bonds mostly underperformed U.S. issues, with the Canadian two-year yield 86 basis points above its U.S. counterpart, compared with around 82 basis points the previous session.
Editing by Peter Galloway