The euro slumped to a four-month low against the dollar on Friday and looked set for more weakness if U.S. payrolls data meets recently raised forecasts, strengthening the case for a sustainable economic recovery.
The greenback remained buoyed by an unexpectedly strong ADP employment report earlier in the week which showed a record number of private sector jobs created in December and prompted economists to raise their forecasts for the payrolls data.
The U.S. jobs number is a mega factor going into 2011 for policymakers as well as markets, said Tom Kaan, a director at Hong Kong-based Louis Capital Markets.
I'd say the recent dollar strength is more likely due to profit-taking on short positions because people were so bearish but if we see U.S. unemployment dip even slightly, it'll mean that things have actually started getting better, said Kaan.
Non-farm payrolls probably increased by an estimated 175,000 in December and the jobless rate eased to 9.7 percent from 9.8 percent, according to a Reuters survey.
The U.S. Labor Department will release the closely watched report at 8:30 a.m. ET.
Another key event on Friday is Federal Reserve Chairman Ben Bernanke's testimony on the U.S. economic outlook to the Senate Budget Committee, which investors will scrutinize for updates on the Fed's plan to continue buying bonds until June.
The dollar index <.DXY>, which measures the greenback's performance against a basket of major currencies, on Friday hit a high of 80.95, a level last seen in early December.
A selloff in peripheral euro zone government bonds before a series of bond issues next week, and an EU proposal that could force those who lend to banks to bear big losses should they fail, helped knock the single currency lower across the board.
Portugal, widely seen as the next euro zone state at the risk of needing a bailout after Greece and Ireland, will lead a series of debt auctions from European nations next week.
ASIAN STOCKS EASE, JAPAN OUTPERFORMS
Japan's Nikkei <.N225>, lifted by a strong day on Chinese bourses, recovered from earlier losses to make a 0.1 percent gain on the day, taking its weekly rise to 3 percent and extending its recent outperformance among Asian markets.
The MSCI Asia ex-Japan <.MIAPJ0000PUS> fell 0.5 percent and was down 0.2 percent in its first week of trading for the year.
Shares in Samsung Electronics <005930.KS>, the world's No.1 memory chip maker, fell 1.3 percent after the company forecast weaker-than-expected fourth quarter earnings. Most analysts see this a blip, with demand for many of the company's businesses, including smartphones, picking up.
Samsung shares are up nearly 25 percent over the past quarter and hovering near record highs.
I think the fourth-quarter results will mark the bottom. Although its DRAM chip sector may remain in a slump in the first quarter, other businesses such as LCD will provide a boost, SK Securities analyst Hwang Yoo-Sik said.
Shanghai's key stocks index <.SSEC> rose 1.5 percent, breaking through key chart resistance, driven by shares in Chinese banks that have lagged global peers.
Investors will look ahead to the start of the corporate earnings season in the U.S. for signs whether an improving macroeconomic landscape is translating into company profits.
Earnings season kicks off next week with aluminum producer Alcoa
(Editing by Daniel Magnowski)