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Shares sink, dollar up before U.S. jobs data

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[August 01, 2014]  By Blaise Robinson

PARIS (Reuters) - Shares tumbled worldwide and the dollar rose on Friday amid expectations a U.S. jobs report would strengthen the case for an early interest rate rise by the U.S. Federal Reserve.

U.S. non-farm payrolls, due at 08.30 a.m. EDT, are expected to show the United States added 233,000 jobs last month and the unemployment rate held steady at 6.1 percent.

While encouraging for the global economy at large, strong job numbers would fuel expectations the Fed will raise rates soon. The U.S. central bank's ultra-loose monetary policy has helped drive a two-year rally in equity markets.

"The market now believes the Fed will move sooner rather than later, and the momentum is turning against the 'safe play of being long equities'," said Steen Jacobsen, chief investment officer at Saxo Bank, in Copenhagen.

Those views got some confirmation when Dallas Federal Reserve Bank President Richard Fisher told a television interviewer it was "very possible" the Fed would start raising rates early next year if the economy kept improving. Speaking on CNBC on Friday, Fisher declined to specify when he expects the Fed to move.

The MSCI All-Country World index was down 0.5 percent and the pan-European FTSEurofirst 300 index dropped 1.3 percent, hitting a 3 1/2-month low. Worries over Argentina's default and sanctions against Russia also weighed on the market. U.S. stock index futures were also sharply lower.

Stocks had started to retreat as expectations of monetary tightening rose, following strong data on U.S. GDP and labour costs earlier this week. Tensions in Ukraine and the Middle East also pulled shares lower.

"Markets are fairly effectively pricing in future rate increases. As long as that's the case, we are confident we won't see any cataclysmic event on the fixed-income side of our risk parity portfolio," said Stuart MacDonald, managing director of hedge fund Aquila Capital.

Also rattling investors, the threat of a conflict between Russia and Ukraine was starting to affect the euro zone economy. A survey showed on Friday the region's manufacturing growth easing in July.

"The slowdown from the confidence peak earlier this year is noticeable," Christian Schulz, senior economist at Berenberg Bank in London. "Especially in Germany, it reflects the Putin factor, which has aggravated the problems of an already troubled Russian economy."

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The dollar hovered around 10-month highs against a basket of currency, on track to record a third strong week.

The cautious mood was also felt in the bond market, where yields on the riskier Spanish and Italian bonds edged higher.

Portuguese bond yields also rose on Friday, amid expectations Lisbon will bail out the country's biggest bank after it reported massive losses.

Brent crude oil fell to a two-week low on Friday, slipping towards $105 a barrel as oversupply in the Atlantic basin and low demand outweighed worries over political tensions in the Middle East, North Africa and Ukraine.

Also on the commodities front, Gold held near a six-week low and was on track for a third straight weekly loss. The prospect of tighter monetary policy curbed appetite for the yellow metal, which has historically been considered an inflation hedge.

Nickel prices fell to their lowest in more than a month on Friday as inventories rose. Other base metals were muted before the U.S. jobs report.

(Additional reporting by Francesco Canepa in London; Editing by Larry King)

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