Dollar trending lower; focus on Fed after jobs data

NEW YORK (Reuters) - The dollar is likely to trend lower in the week ahead after another abysmal U.S. jobs report on Friday, which investors perceive as raising the likelihood of further action by the Federal Reserve to aid the economy.

With the benchmark U.S. interest rate already close to zero, the Fed is limited in the actions it can take.

Two rounds of quantitative easing costing $2.3 trillion, where the U.S. central bank bought government securities for its own balance sheet, simultaneously increasing liquidity in the economy, has failed to increase economic growth.

Yet market expectations are rising that the Fed will embark on a third round of such easing.

But investors in foreign exchange note that raising the supply of dollars lowers its value.

"With the labor market now at 'stall speed,' the data is likely to keep alive expectations for Fed policy easing at the September meeting," said Vassili Serebriakov, currency strategist at Wells Fargo Bank.

The euro shed 2.1 percent against the dollar this week, according to electronic trading platform EBS, its worst week since the week ended July 10, while the dollar rose 0.1 percent against the yen.

The euro is now up 6.1 percent against the dollar in the year to date, while the dollar is down 5.4 percent against the yen so far in 2011.

Speaking last week in Jackson Hole, Wyoming, Bernanke said the Fed had marked down its outlook for the U.S. economy and that the Fed would extend its September meeting to two days from one to consider its options.

"With the Nonfarm Payroll number coming in at zero, and the prior revised 32,000 lower, the Fed has gained greater political ability to enact a version of QE3 at their meeting in September," said Douglas Borthwick, managing director of Faros Trading in Stamford, Connecticut. "We see this as terrifically bearish for the U.S. dollar."

U.S. President Barack Obama will address a joint session of Congress, televised to the nation, next Thursday on ways to increase job creation and accelerate economic growth.

INTERVENTION

Investors will also be keeping a close eye on three central banks.

With the yen and Swiss franc again approaching record lows on purchases by investors who are shunning risk, expectations are high for intervention by the Bank of Japan and the Swiss National Bank to stem the strength of their respective currencies, which would aid the dollar.

Both banks have recently taken action in the currency markets. While investors are ready to test their resolve by buying each currency, they are equally ready to pull the trigger and sell rather than stand in the way of unilateral action.

The central banks of developed economies also have deeper pockets compared with even the wealthiest investors.

The euro fell 4.3 percent against the Swiss franc this week, while the dollar slipped 2.2 percent against the franc.

Some of the euro's declines on the week against the dollar can be traced to euro selling against the Swiss franc.

"The risk of intervention by the Bank of Japan and the Swiss National Bank will limit gains in these currencies," said John Praveen, chief investment strategist at Prudential International Investments Advisers in Newark, New Jersey. Top Swiss politicians came out on Friday in support of steps the Swiss National Bank has taken to limit the rally of the record-strong Swiss franc, potentially strengthening the central bank's resolve to consider currency interventions.

Adding to investors risk in betting against the dollar is a meeting of the European Central Bank on Thursday.

The ECB has been more hawkish than the Fed, even against a backdrop of sovereign debt concerns centered on Greece and other peripheral euro zone nations. But with euro zone growth seen at risk, that may change.

"The general expectation is they will change their tone and indicate they will pause with no rate increases in the near term," said Praveen.

That could raise the relative attractiveness of the dollar against the euro, though given the meeting is ahead of Obama's speech to Congress and the concern about job growth, it may have only limited impact.

U.S. financial markets will be closed on Monday for the Labor Day holiday, the traditional end to the U.S. summer.

(Reporting by Nick Olivari; Editing by Theodore d'Afflisio)