By Lukanyo Mnyanda and Stanley White Nov. 6 (Bloomberg) -- The euro fell against the dollar and the yen on growing speculation the European Central Bank will cut interest rates today and signal more cuts are needed to stave off an economic slump. The 15-nation currency declined in five of the past six days versus the dollar. The ECB may lower its main refinancing rate an unprecedented 1 percentage point today, according to Citigroup Inc. Most economists surveyed by Bloomberg see a half- percentage point cut to 3.25 percent. The pound fell against the dollar after the Bank of England unexpectedly cut its main rate by 1.5 percentage points to 3 percent. ``The market is pretty certain we're going to get 50 basis points'' from the ECB, said Jeremy Stretch, senior strategist in London at Rabobank International, the third-largest Dutch banker. ``I suspect the accompanying rhetoric will be dovish and they'll continue to talk of downside risks to growth.'' The euro fell 0.9 percent to $1.2835 at 7:09 a.m. in New York, from $1.2954 yesterday. It decreased 0.7 percent to 126.02 yen from 126.89. The dollar traded at 98.09 yen, compared with 97.94. The euro may drop to $1.2795 today, Stretch said. The pound fell 0.4 percent to $1.5840. The Australian dollar declined to 67.88 U.S. cents and to 66.39 yen as the UBS Bloomberg Constant Maturity Commodity index of 26 raw materials fell yesterday by the most since Oct. 22. Commodities account for 60 percent of Australia's exports. The yen gained 1.7 percent to 9.86 against the rand. Shrinking Economies The euro-region economy contracted 0.3 percent in the three months through September and according to a Bloomberg News survey may shrink by the same amount in the fourth quarter. German factory orders, adjusted for seasonal swings and inflation, fell 8 percent from August, the Economy Ministry in Berlin said today. That's the biggest drop since records for a reunified Germany began in 1991. Economists expected a decline of 2.3 percent, according to a separate Bloomberg survey. A 100 basis point reduction by the ECB would provide a chance to buy the euro, according to Citigroup, the world's fourth-largest currency trader. Such a cut ``would be unprecedented from the ECB, which has never moved more than 50 basis points in one step,'' analysts including New York-based Tom Fitzpatrick wrote in a research note yesterday. ``An aggressive rate cut is unlikely to mark a sustained decline in the euro and, tactically, an intraday dip should represent an attractive buying opportunity.'' ECB Decision The ECB will announce its decision at 1:45 p.m. in Frankfurt, and the bank's president, Jean-Claude Trichet, will hold a press conference 45 minutes later. The ECB lowered its benchmark rate to 3.75 percent on Oct. 8, joining the Federal Reserve, the Bank of England, the Bank of Canada and the Swiss National Bank in coordinated reductions. Benchmark rates are 1 percent in the U.S. and 0.3 percent in Japan. ``The euro is likely to ease on the decision,'' analysts led by Ulrich Leuchtmann, head of foreign-exchange research in Frankfurt at Commerzbank AG, wrote in a client note. A cut of more than half a point ``would substantially reduce the yield spread to the dollar.'' Gains in the dollar may be limited before economic data tomorrow. 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 75 economists surveyed by Bloomberg News. The U.S. economy contracted 0.3 percent in the third quarter, the biggest decline since 2001. U.S. Stocks U.S. stocks dropped yesterday on concern the world's largest economy will deteriorate even as President-elect Barack Obama plans a $175 billion ``middle-class rescue plan'' to spur growth. The Standard & Poor's 500 Index slumped 5.3 percent, the biggest drop following a presidential election, after data showed service industries contracted the most on record in October. Stocks in Europe also declined today, with the Dow Jones Stoxx 600 Index losing 3.9 percent. The yen and the dollar in October posted their largest monthly gains versus the euro since the 15-nation currency's debut in 1999 as signs of a global recession led investors to seek safety in the Japanese and U.S. currencies. ``You had a perfect storm in October with bad earnings, fund managers needing to sell assets to meet redemptions, and people selling out of commodities and into dollars,'' said Amy Auster, head of foreign-exchange and international economics research at Australia & New Zealand Banking Group Ltd. in Melbourne. ``A lot of those reasons to buy dollars have now come to an end.'' Fed Rate Outlook Futures on the Chicago Board of Trade show a 96 percent chance that the Fed will halve its target rate for overnight lending between banks at its Dec. 16 policy meeting, compared with zero odds a month ago. The Bank of Japan may be powerless to prevent the yen from rising to a 13-year high, according to the world's biggest foreign-exchange traders. Deutsche Bank AG, UBS AG and Barclays Plc predict the yen will recover from its steepest weekly decline since 1999 as investors reduce carry trades that fund purchases of higher- yielding assets by borrowing in Japan and other low-interest rate economies. The currency will appreciate to 90 per dollar even if the Bank of Japan sells it to stem the biggest annual gain since 1998, they said. ``Once the market realizes that we're now in a global recession, there's further deleveraging to come,'' said Geoff Kendrick, a senior currency strategist at UBS in London. Traders ``are capitulating'' after five years of bets against the yen, he said in a Nov. 4 interview. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

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