By Daniel Kruger and Ye Xie Nov. 5 (Bloomberg) -- The dollar fell against the euro as a contraction in U.S. services increased speculation that the Federal Reserve will cut the target lending rate by a half- percentage point next month. The greenback weakened as the Institute for Supply Management reported that non-manufacturing industries shrank in October at the fastest pace on record as a lack of credit and slowing sales caused companies to retrench. The yen rose against the dollar as a drop in stocks encouraged investors to sell higher-yielding assets and pay back low-cost loans in Japan. ``A large part of the reason the euro rallied is the negativity extrapolated from the ISM,'' said Jessica Hoversen, a fixed-income and currency analyst in Chicago at MF Global Ltd., the world's largest broker of exchange-traded futures and options contracts. The dollar depreciated 0.6 percent to $1.3064 per euro at 10:53 a.m. in New York, from $1.2981 yesterday, when the greenback fell 2.6 percent. The dollar dropped 0.5 percent to 99.26 yen from 99.70. The euro traded at 129.72 yen, compared with 129.47. The ISM's non-manufacturing index, which covers almost 90 percent of the U.S. economy, dropped last month to 44.4, the lowest level since records began in 1997, the Tempe, Arizona- based group said today. A reading of 50 is the dividing line between growth and contraction. Company Job Cuts Companies in the U.S. cut an estimated 157,000 jobs in October, the most in almost six years, a private report based on payroll data showed today. The drop was larger than forecast and followed a revised 26,000 decrease in September that was bigger than previously estimated, ADP Employer Services said. Total U.S. payrolls fell by 200,000 last month, and the unemployment rate rose to a five-year high of 6.3 percent, according to the median forecast of economists surveyed by Bloomberg News. The Labor Department's report is due Nov. 7. U.S. stocks dropped as the contraction in company hiring spurred concern the world's largest economy will worsen even as President-elect Barack Obama takes steps to stimulate growth. The Standard & Poor's 500 Index dropped 1.2 percent. To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

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