OTTAWA - The strong Canadian dollar is flexing its muscle, squeezing Canada's exports and shrinking its trade surplus.

New data from Statistics Canada shows the country's trade surplus with the rest of the world narrowed sharply in March, even though Canadian exporters shipped 2.3 per cent more product out the country.

Canada recorded a $254-million surplus during the month, down from $1.2 billion in February and a fraction of what was expected. Meanwhile, the value of exports fell outright for the first time in seven months by about $253 million.

Export Development Canada said the high dollar was partly responsible for the drop, noting that in the auto sector alone exporters lost about $200 million in the value of shipments.

“The persistent strength of the Canadian dollar will impact exports for months to come,” said Peter Hall, EDC's chief economist.

From February to the end of March, the loonie rose steadily from about 93 cents US to 98.77 cents.

Economists said that despite the weak headline trade numbers, the overall trade performance was good news for the Canadian economy since higher volumes suggest more production and economic activity. It was also the sixth straight monthly surplus, following a string of deficits during the recession.

The Canadian dollar continued to gain Wednesday after last week's plunge, nearing parity with the U.S. greenback once again. The loonie closed up 0.19 cent at 98.06 cents US.

The decline in exports was attributable to the high dollar and lower prices for commodities, and trade remains a net gain for the economy, said Bank of Montreal economist Benjamin Reitzes.

Another positive was that exports of manufactured goods, including forestry products, have been gaining steam. Exports of auto products have hovered around $4.5 billion for the last two months, a big improvement from the floor of about $3 billion seen during the recent slump.

Imports rose two per cent, also a signal of increased economic activity in the domestic economy.

“Overall, this is good news. The strength in volumes on both sides, exports and imports, probably points to strengthening economic activity, maybe stronger than expected,” said Reitzes.

The analysis is in line with economists' expectations that Canada's economy expanded by about six per cent in the first quarter of the year. The Bank of Canada has forecast a 5.8 per cent bump following a five per cent advance in the last three months of 2009.

Economists cautioned that exports, which represent about one-third of Canada's economy, are still a long way from the pre-recession peak, even though that was inflated by the outsized spike in the world price for oil and other commodities that occurred in the summer of 2008.

And the longer term outlook is not all rosy, they add, given that the prospects for global growth have dimmed somewhat in the wake of the Greek debt crisis and expectations that other major nations, including the U.S., are now entering years of fiscal consolidation as they try to rein in ballooning deficits.

U.S. demand for Canadian goods remains weak, with exports to that country declining 2.5 per cent in March. The trade surplus with Canada's largest trading partner narrowed to $3.8 billion from $4.3 billion.

The loonie is also affecting goods flowing into Canada by making foreign products less expensive to Canadians. Imports may have risen two per cent in value in March, but in volume terms the gain was a massive 5.3 per cent.

CIBC economist Krishen Rangasamy suggested that fiscal drag in several countries Canada trades with, particularly the U.S., means the rebound in exports may not last the year.

Rangasamy forecast that trade will cease being a contributor to gross domestic growth in Canada by the second half of this year.

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