By Ye Xie and Daniel Kruger Oct. 3 (Bloomberg) -- The dollar fell against the yen for a third day after a government report showed U.S. employers cut more jobs last month than economists forecast, indicating the world's largest economy is headed for a recession. The greenback dropped as traders raised bets that the Federal Reserve will reduce the target lending rate by as much as three-quarters of percentage point this month. The U.S. House of Representatives prepared to vote on a revised $700 billion financial bailout after rejecting a plan Sept. 29. ``The U.S. economy is nowhere near recovery,'' said Samarjit Shankar, director of strategy for the global markets group in Boston at Bank of New York Mellon, the world's largest custodial bank, with more than $23 trillion in assets under administration. ``The next possible move by the Fed is a rate reduction.'' The dollar dropped 0.1 percent to 105.20 yen at 8:53 a.m. in New York, from 105.33 yesterday. It increased 0.3 percent to $1.3775 per euro, from $1.3819. The euro decreased 0.4 percent to 145.03 yen, from 145.55 U.S. payrolls shrank by 159,000 last month, following a revised decline of 73,000 in August, the Labor Department said today in Washington. The median forecast of 76 economists surveyed by Bloomberg News was for a reduction of 105,000. The jobless rate stayed at 6.1 percent. The U.S. has lost jobs every month this year. The number of people staying on jobless rolls rose to 3.591 million, the highest since September 2003, in the week ended Sept. 20, the Labor Department reported yesterday. Euro's Record Drop The euro was headed for a record 5.6 percent weekly drop against the dollar after European Central Bank President Jean- Claude Trichet said yesterday policy makers discussed cutting the main refinancing rate. European economies face ``increasing downside risks,'' he said at a Frankfurt press conference following the decision to keep borrowing costs at a seven-year high of 4.25 percent. The implied yield on the Euribor futures contract expiring in March fell to 4.10 percent, from 4.77 percent a month ago. The Euribor contract has averaged 44 basis points, or 0.44 percentage point, higher than the ECB's overnight target during the past two years, Bloomberg data show. Five European banks including Dexia SA, the world's biggest lender to local governments, and Fortis, Belgium's largest financial-services firm, accepted government-backed bailouts this week. Investors should sell the euro at 145 yen with a target of 135 yen after the ECB signaled it may lower borrowing costs for the first time in five years, according to Morgan Stanley. `Dimming Quickly' ``Growth prospects in the euro zone are dimming quickly and may force the ECB's easing hand sooner rather than later,'' New York-based strategists Sophia Drossos and Yilin Nie wrote in a research note yesterday. The U.S. House will vote on the latest version of the financial bailout at about 12:30 p.m. in Washington. The Senate voted 74-25 on Oct. 1 in favor of legislation that links the rescue to an increase in bank-deposit insurance limits and tax breaks after the House rejected an earlier version of the bill. Wells Fargo & Co., the biggest U.S. bank on the West Coast, agreed to buy all of Wachovia Corp. for about $15.1 billion in stock, trumping Citigroup Inc.'s offer four days ago for part of the embattled North Carolina lender. The U.S. currency surged 12 percent versus the euro last quarter, its biggest gain since the European currency started trading in 1999, as the credit crisis that began in the U.S. with rising delinquency rates for subprime mortgages spread to continental Europe and the U.K. Dollar and Oil The dollar also gained as crude oil futures fell 35 percent from a record of $147.27 a barrel reached on July 11. The euro- dollar exchange rate and oil have had a correlation of 0.8 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep. Futures on the Chicago Board of Trade showed an 84 percent chance that the Fed will cut its 2 percent target rate for overnight lending between banks by a half-percentage point at its Oct. 29 meeting, with the balance of bets on a reduction of three-quarter points. Futures showed no chance of lower borrowing costs a month ago. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

Source