Dollar to shrug off jobs report, focus on bailout

By Lucia Mutikani

NEW YORK (Reuters) - A deepening global financial crisis and slowing European economic growth will probably shield the U.S. dollar from more evidence of a weakening U.S. labor market on Friday this week.

While September's U.S. monthly jobs report from the U.S. Labor Department would likely confirm economic growth is weakening again, after a partial recovery in the first half of 2008, the data may be overshadowed by the outcome of the Congressional vote on a $700 billion plan to help restart lending by financial institutions.

"The economic data is definitely on the back burner. The key issue is whether the bailout package is passed or not and what the details are on how it is going to affect the U.S. fiscal deficit going forward," said Samarjit Shankar, global foreign exchange strategist at the Bank of New York Mellon in Boston.

The U.S. House of Representatives on Monday rejected a bill to give the U.S. Treasury the authority to buy hard-to-value mortgage-backed assets from banks in order to strengthen their balance sheets and revive the extension of credit through the economy.

The Labor Department's September employment report is forecast to show U.S. employers eliminated 100,000 jobs from their payrolls after 84,000 were shed in August, according to a Reuters survey.

Payrolls are expected to decline for the ninth straight month, and if they fall by more than 100,000 that would represent the biggest monthly employment decline in at least five-and-a-half years.

The U.S. dollar has rallied in the past two months though, despite a string of poor economic data, as evidence mounts that Europe and Asia may now be experiencing an economic slowdown also and as banks in Europe in particular suffer from the credit crunch of the past year.

As a result both U.S. and international investors have been liquidating assets in emerging markets in particular and buying safe-haven U.S. Treasuries, giving the dollar a boost.

This risk aversion trend is expected to continue, even if Friday's U.S. payrolls report is even worse than expected, analysts said. The dollar also was unshaken by data on Wednesday showing that U.S. factory activity shrank in September to its lowest since the 2001 recession.

"Like the recent economic data that has been coming in worse-than-expected, there is no reason to expect that the jobs report would not come in worse than expected. (But) the market can sift through that," said Marc Chandler, head of global currency strategy at Brown Brothers Harriman in New York.

"The bigger thing is that the Fed, Treasury, SEC and FDIC are taking steps to try and help address the financial crisis. While the U.S. is on a systemic approach, Europe is kind of messy. Europe is putting one fire out at a time."

In a sign that the financial contagion, originating from rising defaults on U.S. subprime mortgages and falling home values, has spread across the Atlantic, European governments scrambled this week to shore up their own banks through nationalizations and capital infusions.

At the same time, data showed euro zone economic sentiment continued to deteriorate in September, while manufacturing activity also dropped to a near seven-year low during the same month.

However, the markets will still take an interest in the U.S. unemployment rate on Friday, after it jumped to a five-year high of 6.1 percent in August.

"If that picks up too, that would increase expectations for the next Fed move being a reduction (in interest rates)," said Bank of New York Mellon's Shankar.

The Federal Reserve has cut its overnight lending rate by 3.25 percentage points to 2.0 percent since September last year, in a bid to stop the U.S. housing market slump from affecting the broader economy.