By Lukanyo Mnyanda Nov. 6 (Bloomberg) -- The euro dropped against the dollar and the yen after the European Central Bank cut its benchmark interest rate to the lowest level in almost two years and investors bet a looming recession will spur more reductions. Europe's common currency fell as policy makers cut the key rate by half a percentage point to 3.25 percent, the lowest level since December 2006, matching the median forecast of 55 economists surveyed by Bloomberg News. The Bank of England unexpectedly cut its benchmark rate by 1.5 percentage points to 3 percent today. ``We'll see more dollar strength as the U.S. will be the first one to pull itself out of recession,'' Peter Rosenstreich, chief market analyst of ACM Advanced Currency Markets in Geneva, said before the decision. ``All the data is pointing to the euro- zone economy spiraling into a recession.'' The euro fell to $1.2806 as of 12:46 p.m. in London, from $1.2954 yesterday. The single currency has weakened about 19 percent against the dollar since climbing to a record of $1.6038 on July 15. It was at 125.54 yen, from 126.89. 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. ECB President Jean-Claude Trichet is scheduled to hold a press conference to explain today's decision at 2:30 p.m. in Frankfurt. Orders Plunge A government report today showed manufacturing orders in Germany, the euro region's biggest economy, dropped by a record 8 percent in September, led by a slump in foreign demand for factory machinery. The European Commission on Nov. 3 said the region may be in a recession and said the economy will stagnate next year. The euro-region economy contracted 0.3 percent in the three months through September and may shrink by the same amount in the fourth quarter, according to a Bloomberg News survey. A 100 basis-point reduction by the ECB would have provided a chance to buy the euro, according to Citigroup Inc., 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.'' ``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. Economic Reports 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. The U.S. economy contracted 0.3 percent in the third quarter, the biggest decline since 2001. 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.'' Futures on the Chicago Board of Trade showed 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 percent odds a month ago. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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