Fortunes of Dollar Will Turn on Whether Jobs Report Sways Fed

(Bloomberg) -- It would take a blow-out jobs report next week to get the dollar to move out of its slump.

The greenback fell for a second week as foreign-exchange managers search for clues about the strength of the economy and the Federal Reserve’s next policy move. The Oct. 7 employment data may shift market-based expectations for the central bank to raise interest rates this year. On Friday, they showed a 17 percent probability of a rate hike when the central bank meets in November and 59 percent for a move by December.

The U.S. currency has fallen 4 percent this year as traders anticipate the central bank will be slow to raise rates amid uneven economic data. Yet the Fed indicated this month it remains data-dependent, it is pleased with the progress of the economy, and that every policy meeting is "live" for a rate hike, setting up the potential for dollar appreciation.

"Strong data puts November on the table," said Mark McCormick, North American head of foreign-exchange strategy at Toronto-Dominion Bank. "The data feeds into the Fed view -- anything above 150,000 keeps December live and could support the U.S. dollar against the majors."

Toronto-Dominion expects the dollar to strengthen to $1.04 per euro by year-end from about $1.12 Friday.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 of its major peers, fell 0.3 percent this week. It declined 0.4 percent last month and dropped 0.2 percent in the third quarter.

Tightening Cycle

Dollar bulls face the prospect of the slowest and shallowest tightening cycle in recent history, based on the market for overnight index swaps, which reflect expectations for the fed funds effective rate. The contracts imply the rate will rise to about 0.8 percent in three years from 0.4 percent now -- just more than one hike during the next 36 months.

Yet hedge funds are optimistic on the dollar’s strength. Speculators raised net-bullish futures positions on the dollar to the highest since February, according to the Commodity Futures Trading Commission. Bets that the currency will rise outnumbered bearish wagers by 190,081 contracts in the week to Sept. 27, compared with 150,620 the previous week.

Forecasts for sustainable jobs-market gains may brighten the outlook for Fed hikes and the greenback. Economists expect Friday’s Labor Department figures to show a gain of 170,000 in September, below the average of 182,000 this year.

"It’s not about having 200,000," said Andres Jaime, a foreign-exchange and rates strategist at Barclays Plc in New York, referring to jobs growth. "Probably a lower pace would be enough for them to hike. The markets are not 100 percent sure about December, but the degree of confidence is high."

Jaime expects the greenback to strengthen to $1.08 per euro by year-end.

To contact the reporters on this story: Susanne Barton in New York at swalker33@bloomberg.net, Yun Li in New York at yli934@bloomberg.net. To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Paul Cox, Mark Tannenbaum