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How a Weak Jobs Report Could Tip the QE3 Scales

Thursday, 1 Sep 2011 | 2:07 PM ET
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The outlook for the nonfarm payroll report due Friday isn't what it once was. Here's what it might mean for the Fed, and the dollar.

Amid a wave of gloomy economic indicators, economists are busy cutting their forecasts for Friday's nonfarm payroll report. Goldman Sachs today cut its forecast for nonfarm payroll growth to 25,000 from 50,000, citing weak hiring data, gloomy Conference Board surveys, and more.

It's all kind of glumly convincing, and it raises the question: is there a number low enough to push the Federal Reserve into another round of quantitative easing , and the ensuing pressure on the dollar?

Yes, says Kathy Lien, director of currency research at GFT. "If the Bureau of Labor Statistics reveals that fewer than 50k people found new work in the month of August, the Federal Reserve will be forced to spring into action sooner than they would otherwise prefer. If it was up to the central bank, they would wait for as much data as possible before deciding on more stimulus but investors may not have the same degree of patience and could send the dollar, stocks and bonds sharply lower."

Others, though, think it would take more than that to push the Fed to act. The analysts at forexcrunch.com argue that "official market expectations stand on a gain of 90K jobs. A slightly lower figure of between 40K to 70K will not come as a big surprise."

Either way, the Fed may well do nothing until its two-day meeting later this month, so it's reasonable to expect a fair amount of volatility for the dollar as investors' expectations shift. Lien says the currency pair to watch is dollar-yen because of what she calls its "logical reaction to U.S. data." Other traders lay out a graduated scenario for the dollar: strength if the jobs number is strong and the odds of QE3 diminish, weak if jobs come in at or slightly below expectations - and stronger if the number is extremely low and investors are looking for safe havens.

Fasten your seatbelts.

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