March 7 (Reuters) - The euro was set for its best week in 16 years against the dollar on Friday, boosted by Germany's game-changing fiscal reforms, while worries over growth and tariffs drove the greenback to a four-month low ahead of U.S. jobs data.
It has been a volatile week for the currency market, driven mainly by U.S. trade and economic growth uncertainties and a pivotal development in Europe as its largest economy abandoned its fiscal constraints to boost spending and revive growth.
"This week is a watershed moment ...because we've lived through a couple of years of dollar and U.S. growth exceptionalism," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.
Following a slew of mixed economic data out of the United States so far this week, the focus on Friday falls on U.S. nonfarm payrolls numbers as market participants will assess the health of the economy and its implications on inflation and interest rates.
The U.S. dollar index has fallen more than 3.5% this week to its lowest since early November.
The euro, on the other hand, has risen more than 4.5% and was set for its biggest weekly jump since March 2009. It was perched at its highest since early November and was last up 0.6% on the day at $1.08520.
"Right now we're in a situation where investors are buying dips in euro/dollar and I think payrolls today can only accelerate the move higher," Broux said.
"I do not think that a stronger NFP print is going to stop this move higher in euro/dollar. It could slow it, but I don't think it's going to change the trend."
The European Central Bank's hawkish rate cut and surging European bond yields on the back of Germany's massive spending proposal has helped lift the common currency.
BofA Global Research raised its year-end forecast for the euro to $1.15, from $1.10 previously.
The pound headed for its worst weekly performance against the euro since 2023, while it strengthened against the dollar.
'FALLEN OUT OF FAVOUR'
Another reprieve of levies aimed at Mexico and Canada announced by U.S. President Donald Trump on Thursday offered little relief to whiplashed markets.
The greenback edged 0.1% higher on the Canadian dollar to C$1.4317 but slipped 0.2% against the Mexican peso to 20.2276 pesos.
The exemption expires on April 2 when Trump said he will impose reciprocal tariffs on all U.S. trading partners.
The dollar has "fallen out of favour" amid the uncertainty, with the perceived inflationary impact of tariffs no longer enough to support it, said Kieran Williams, head of Asia FX at InTouch Capital Markets.
"Ahead of the NFP survey, evidence has tilted towards a softer outcome. If this transpires it could spook markets further," he said.
Against a backdrop of federal job culls, the U.S. likely added 160,000 jobs in February compared with 143,000 in January, while the unemployment rate is expected to have held steady at 4.0%, economists forecast in a Reuters poll.
Federal Reserve Chair Jerome Powell will be able to follow up the jobs report when he speaks later in the day on the economic outlook.
Markets currently have three Fed rate cuts priced in for the rest of the year.
The safe-haven yen is at its strongest against the greenback since early October, while the Swiss franc hit a three-month peak of 0.8838 .
Japan's economy minister Ryosei Akazawa said the nation has cleared the key threshold for the government to officially declare an end to long-term price deflation.
Inflationary pressure from wage gains and prolonged rises in food costs could prompt Bank of Japan board members to discuss another interest rate hike as soon as in May, three sources familiar with its thinking told Reuters.
Elsewhere in Asia, the offshore yuan steadied at 7.2346. China's exports slowed over the January-February period and imports unexpectedly contracted, official data on Friday shows, as trade tensions escalated with the United States.
The risk-sensitive Australian dollar slid 0.2% to $0.6320.
Reporting by Yadarisa Shabong in Bengaluru and Brigid Riley in Tokyo; additional reporting by Rae Wee in Singapore; Editing by Christopher Cushing, Stephen Coates, Kim Coghill and Timothy Heritage
