Before last week, the dollar had been locked in a one-way trade, rising more than 10 percent this year. It gained on improvements in the economy but also on the fact that the U.S. was heading for a higher interest rates while other central banks were maintaining easier policies.
The March employment report next Friday will also be a trickier trade since it will be released on Good Friday, when markets across Europe and the U.S. are closed. Futures markets for interest rates and currency are open in the U.S. on Friday morning until 11:15 a.m. EDT. According to Thomson Reuters, the 8:30 a.m. nonfarm payrolls report is expected at 242,000 and the unemployment rate is expected to be 5.5 percent.
Employment numbers have been one bright spot in the economic data, which has soured lately as first quarter growth appears to have slumped well below 2 percent. Weak manufacturing and other data and low inflation have also fueled a debate about whether the Fed could even delay the start of interest rate hikes beyond September.
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"It will be important. We're really at the cusp of trying to figure out if the Fed is going to delay or proceed, and the jobs number in many ways could be the tipping point for their decision making apparatus," said Boris Schlossberg, managing director, foreign exchange strategy at BK Asset Management.
"If we have another strong employment data set, the argument for remaining at zero bound really begins to melt away. Even if there is wage growth and inflation growth, there's a six month lag between job creation and consumer spending, and the Fed is going to try to be as anticipatory as possible."
Fed Chair Janet Yellen speaks just before the closing bell Friday, and traders are watching for potential dollar impact even ahead of next week's jobs related data. Rising Treasury yields and worries about the Middle East helped lift the dollar on Thursday, but it gave back some ground Friday. The euro was at $1.08 to the dollar, after touching a key technical level above $1.10 Thursday.
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"The question is are we going naturally segueing to a stronger dollar story driven by U.S. rates, and the payroll number is going to be an arbiter of whether that's the case," Deutsche Bank's Ruskin said.
Marc Chandler, chief currency strategist at Brown Brothers Harriman, said he expects the dollar-jobs impact to begin even sooner than next Friday, and the turning point could be Wednesday when ADP data is released. ADP's private payroll number is seen as a preview of the Labor Department's jobs report, and is expected to show 225,000 jobs, he said.
"The bottom line is ADP data has been stealing the thunder from the jobs report," he said. "If we're looking for a window or a potential turning point. I'd say the ADP in the week ahead is the thing."
Chandler said trading could also be dampened next week by the fact that the end of quarter Tuesday, and end of year for some countries, like Japan, collides with Easter. "My best guess is they'll wait till the week after," he said, noting the trading could be light and more investors will come in post-Easter.
The dollar's recent correction has been expected by strategists to be short lived, and the Fed meeting, if anything was expected to merely slow the jump in the currency.
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"It seems to me the dollar's downside correction might not be over technically," Chandler said. "This week, the 10-year yield was a little firmer but the euro dollar and fed funds futures were a little softer. What it's going to take is the market to reassess the low likelihood it's giving to a June rate hike."
Schlossberg said one wild card next week could also be geopolitcial developments. Markets reacted initially to worries about Saudi Arabia's airstrikes in Yemen but have since backed off.