By James Thornhill
LONDON, Nov 2 - The dollar drifted lower against the yen and the euro on Friday as the market braced itself for data likely to show the unemployment rate in the United States jumped sharply in October.
However, trade was muted with most dealers taking the view that bad news from the jobs report had been largely discounted.
"A bad figure for payrolls is priced in. You'd have to get a figure of more than 400,000 jobs lost before you'd seen any real market reaction," said Nick Parsons, global head of foreign exchange research at Commerzbank.
The U.S. non-farm payroll report, due at 1330 GMT, is expected to show a fall of 289,000 jobs in October with the unemployment rate rising to 5.2 percent from 4.9 percent, a poll of analysts showed.
At 1040 GMT, the euro was trading at $0.9044 compared with $0.9025 late in New York on Thursday.
Against the yen, the dollar was at 121.61 yen against Thursday's late U.S. level of 121.96. Widespread market talk of option strikes at 122 yen, expiring later in the day, kept the spot price choppy around that level. The dollar fell to two-week low levels against the euro on Thursday in anticipation of a weak report from the National Association of Purchasing Management. The NAPM's monthly gauge of factory activity plunged to its lowest level since the 1991 recession but a resilient performance on Wall Street, which saw the Dow Jones industrial average close the day up just over two percent, helped the dollar off its worse levels. INTEREST RATE OUTLOOK EYED With a bad payrolls number already taken as read, dealers began to shift their attention to key rate decisions in the U.S. and Europe next week. Analysts said the Federal Reserve was likely to respond to this week's data with another rate cut, while there remains a risk that the European Central Bank will continue to drag its feet on monetary easing.
"The market is looking for a 50 basis point cut from the Fed, and (Fed chairman Alan) Greenspan will probably not want to disappoint," said Steven Saywell, currency strategist at Citibank.
However, he added the move was unlikely to relieve the recent pressure on the dollar. "This week's...data shows the U.S. economy is in trouble and we are forecasting another two percent decline in growth in the fourth quarter. That should keep equity markets and the dollar under pressure," said Saywell.
Saywell noted that dollar weakness was more likely to be reflected through the yen, Swiss franc and sterling rather than the euro. "We do expect a 25 basis point cut from the ECB next week, but the sense of reluctance is very strong," he said.
Many in the market feel a 25 basis point cut would still be insufficient to counter signs of a sharp economic slow-down in the euro zone. "There is a growing realisation that the U.S. problems are equally Europe's," said Parsons at Commerz.
This was reflected in a gloomy string of euro zone purchasing managers' surveys (PMI) on the manufacturing sector on Friday.
The pan-euro zone PMI fell to 42.9, from 45.9 in September, well below expectations and the lowest in the survey's four year history.
ARGENTINA'S PACKAGE The market showed little reaction to Argentina's long-awaited announcement late on Thursday of new measures aimed at saving the ailing economy from collapse by restructuring its entire $132 billion public debt. "Default risk still looms because details on its planned debt swap are still unclear from today's announcement," a forex manager at a Japanese securities firm said. "There is caution about Argentina. The problem has clearly intensified in recent weeks," he said.