The US dollar will likely rise against the euro next week if key payrolls data on Friday is as weak as expected, supporting the view the Federal Reserve will cut interest rates again in December.
The dollar this month fell to a record low against the European currency, but it recouped some of its losses this week after both Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn hinted this week the central bank may cut interest rates to prevent the US economy from sliding further.
Lower benchmark rates may diminish the return on dollar-denominated assets but recently investors have shifted their point of view. Many now believe low rates may help boost long-term economic growth, giving some needed support to the greenback.
"The jobs report, in combination with any developments in the financial markets next week, is going to be very important to the dollar," said Meg Browne, a currency strategist at Brown Brothers Harriman in New York. "Sentiment on the dollar remains down, despite the rebound we've seen this week."
Trading will likely be choppy next week as the market awaits the payrolls data. The euro surged to a lifetime peak of $1.4966 on November 23, stopping short of the key $1.50 mark. Still, the European currency traded 0.6 percent lower at $1.4642 on Friday in New York.
The dollar also rallied on Friday against a basket of major currencies and was on track for its biggest weekly gain in more than a year. The dollar index, which measures the greenback against six major currencies. rose 0.7 percent to 76.112 and was up more than 1 percent on the week.
"A soft payrolls report adds to case for Fed easing," economists at Calyon Securities said in a note to clients. The Fed has already slashed 75 basis points from the benchmark federal funds rate since mid-September, and it now stands at 4.5 percent. Policy makers next meet on December 11. Analysts say the focus now will change to next week's economic releases and a rate-setting meeting by the European Central Bank on Thursday. Highlights include a reading on US manufacturing activity on Monday and the November payroll report on Friday.
"The US dollar has strengthened a bit, but the operative words here are 'a bit'," analyst Dennis Gartman said in his daily commentary. "The Fed is openly disposed to further ease, but this Fed is data driven and it will be compiling data right up to the morning of the December 11 meeting."
Economists polled by Reuters forecast a manufacturing index to remain little changed in November, dipping to 50.5 from 50.9 in October. In another poll, economists expect the US economy added 73,000 jobs last month, less than half the figure in October. The economists also expect the ECB to keep rates on hold at 4 percent on Thursday.
"There is also unlikely to be much change in President Trichet's tone," they added. "He will reaffirm the upside risks to inflation, confirm that growth risks lie to the downside and probably reiterate that the Bank will monitor very carefully all developments." Presidents from the San Francisco, St. Louis and Boston Federal Reserve Banks are scheduled to speak around the country next week.