FX OUTLOOK-U.S. dollar strength still the norm next week

* Greece remains dominant FX issue despite EU/IMF deal

* Focus on U.S. payrolls; some see upside surprise

* Canadian dollar continues to do well

By Gertrude Chavez-Dreyfuss

NEW YORK, March 26 (Reuters) - The safe-haven U.S. dollar should remain attractive this coming week as worries about Greece drag on despite an assistance package for the debt-strapped country.

A U.S. non-farm payrolls report for March will be the week's key highlight and is expected to show 168,000 new jobs created and an unemployment rate that is unchanged from the previous month. See [ECI/US]. Signs of an improving U.S. economy should support the dollar further, analysts said.

A deal between the European Union and the International Monetary Fund to provide Greece a financial safety net has prevented a freefall in the euro, but analysts said sentiment on the single currency remains downbeat. For the Greece aid story, click on [ID:nLDE62N2R1].

"Although we have this agreement on a Greece aid package, it is somewhat unclear as to whether it is going to be applied, when is it going to be applied...and the fact is Greece still has considerable debt," said John McCarthy, director of foreign exchange at ING Capital Markets in New York.

"What's to say that we will not go through this again with Greece or Portugal. This is not going away in the immediate future."

The euro EUR= was down 0.9 percent versus the dollar this week after losses of 1.9 percent the previous week. On the year, however, the euro has fallen 6.4 percent.

Not a few strategists have predicted the euro falling to $1.30 despite the EU-IMF deal.

Ryan Gibbons, managing partner at corporate FX advisory firm GPS Capital Markets in Salt Lake City, Utah, believes the euro is in a long-term downtrend, much like the U.S. dollar's seven-year slump just before the global financial crisis.

"Frankly, there is nothing coming between $1.33 and $1.29," Gibbons said, although on Friday, the euro rallied from 10-month lows. Analysts said the euro has a higher bias while trading above $1.3345/50.

ALL EYES ON U.S. PAYROLLS

Aside from Greece, investors will be focused on the U.S. non-farm payrolls report, which is expected to show the worst of the labor downturn could be well in the past.

"Although the February data continued to print job losses, there are several signs the March U.S. payroll report is a very likely candidate for a significant upside surprise. This would overcome some of the skepticism about the current job market recovery," said Danske Bank in a research note.

Danske is forecasting new jobs of 400,000 for March, the most optimistic employment forecast so far.

The Copenhagen-based bank added that a positive surprise in the jobs report should boost the perception of a more sustained turnaround in the labor market. That should support risk appetite, push bond yields higher, and add to downward pressure on the euro against the dollar.

Key U.S. manufacturing reports -- the March U.S. Institute Supply for Management report and the Chicago manufacturing survey -- are also due out next week. Both indexes are expected to confirm the U.S. economy is on the road to recovery.

In other currencies, the Canadian dollar will retain support against the greenback, as interest rate expectations have begun to accelerate in Canada. Investors as a result have set their sights on parity between the two currencies.

As reflected in implied yields on December 2010 BA futures contracts, investors have moved to price in nearly 16 basis points of interest rate tightening in the past week alone.

This leaves Canadian rate expectations a full 40 basis points above their 2010 lows and at their highest level since early January. The rise in Canadian interest rate expectations have well outpaced that seen in the United States.

On the week, however, the U.S. dollar was up 1.2 percent versus the Canadian unit CAD=. But on the year, the Canadian dollar is up 2.3 percent so far versus the U.S. dollar.

(Editing by Andrew Hay)