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Dollar to gain as 'winter blues' fade from data

The U.S. dollar will likely draw support from expected improvements in economic data this week, culminating in Friday's closely-watched jobs numbers, according to CNBC's latest survey of currency strategists and traders.

Importantly, key economic numbers for March - which will include Tuesday's ISM (Institute of Supply Management)'s manufacturing index and its services sector equivalent on Thursday - should be largely free of the distortions caused by recent extreme winter weather, and will likely show resilience in the broader economy.

Jeff Kowalsky | Bloomberg | Getty Images

"The U.S. seems to be shaking off the 'winter weather blues', with the broad complexion of the data looking overall less discouraging than the picture of consistent weakness seen in February," said Sean Callow, senior currency strategist at Westpac Bank.

On average, economists believe around 200,000 more Americans joined the workforce in March, according to Reuters estimates. Meanwhile, the ISM manufacturing index is forecast at 54.0, up slightly from the February level of 53.2.

"I suspect the payrolls will be another pro-risk number, endorsing the more hawkish Federal Reserve," said Simon Grose-Hodge, head of investment advisory, South Asia, at LGT Bank.

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About 65 percent (17 out of 26 respondents) in CNBC's weekly sentiment survey forecast gains in the U.S. dollar this trading week. Thirty-one percent (8 out of 26) said the currency would be little changed, while just one respondent said the dollar would weaken.

'Major move'

Dollar-bull UBS is calling for a March payrolls gain of 250,000, helping drive the jobless rate down to 6.6 percent from 6.7 percent.

A strong payrolls release this week, "Has the potential to induce a major move in the greenback, particularly as the latest data suggest America's economy is emerging from its winter slowdown," Mansoor Mohi-uddin, UBS head of foreign exchange strategy, said in a report on Saturday.

UBS Economics forecasts March's manufacturing ISM will increase to 54.0, in line with Reuters estimates.

Still, Westpac's Callow warned not to expect too much from this week's data, and said current expectations were set too high.

"Scope for a dramatically better than expected ISM and payrolls read ... seems constrained, with consensus looking a touch too optimistic," Callow said. He added that he was bullish on the dollar this week "but only moderately."

Ray Attrill, co-head of currency strategy at National Australia Bank, was also cautious, and advocated a neutral stance towards the dollar this week.

"Payrolls could be the last chance saloon for a stronger dollar in April," Attrill told CNBC in an email. Barring a really strong number of 225,000 or higher in payrolls gains, "There's probably more U.S. dollar downside on a weak print, than upside on an okay one, so the opportune trade may be to be short into the number."

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Yellen speaks

Ahead of the jobs report, currency markets will focus on scheduled remarks on Monday from Federal Reserve Chair Janet Yellen, who will speak in Chicago.

"Traders will listen carefully to glean the tone of the central bank chief's rhetoric for confirmation of the relatively hawkish tilt noted following the March FOMC (Federal Open Market Committee) meeting," said Ilya Spivak, currency strategist,at FXCM Live. "Needless to say, the presence of such cues is likely to bode well for the U.S. dollar."

Yellen did not make a "mistake" when she said that the central bank would start raising interest rates around six months after its bond-buying program ends, Philadelphia Federal Reserve Bank President Charles Plosser told CNBC last week.

UBS was also taking Yellen's signals on policy direction at face value.

"This month's Federal Open Market Committee meeting has primed the dollar for a major rally over the next few weeks," Mohi-uddin said. "Policymakers have raised the risk that the first Fed rate increase may be only one year away now. Thus currency markets are likely to react strongly to a faster rebound in U.S. data over the next couple of months."