June 2 (Bloomberg) -- The dollar fell the most in a week against the yen after a government report showed the U.S. economy added 75,000 jobs last month, fewer than any economist forecast.

The U.S. currency also declined against the British pound and Swiss franc as traders pared bets the Federal Reserve will raise interest rates for a 17th straight time later this month. Interest-rate futures showed the odds of a rate increase fell below 50 percent, the lowest since mid-May.

``We're questioning how much growth we will have going forward,'' said David Durrant, an investment strategist in New York at Julius Baer Investment Management, which oversees about $40 billion. ``We're dollar bears and we expect it will go a little farther.''

The U.S. currency declined to 111.71 yen at 5 p.m. in New York from 112.71 yen late yesterday, for a 0.8 percent weekly drop. It fell to $1.2918 per euro from $1.2804 yesterday, pushing the dollar to the weakest since a one-year low of $1.2972 per euro on May 15. The dollar lost 1.4 percent this week versus the euro.

May's job additions came after a gain of 126,000 in April, the Labor Department said. The unemployment rate fell to 4.6 percent from 4.7 percent. The median forecast of economists surveyed by Bloomberg was for the economy to generate 170,000 jobs, and all 80 analysts polled predicted a higher figure.

Lower Odds

Interest-rate futures showed traders see a 48 percent chance the Fed will lift its benchmark a quarter-point to 5.25 percent on June 29, compared with 68 percent odds before the report's release, and the lowest since May 16.

``This places significant downward pressure on the dollar going forward,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``There were few redeeming factors'' in the report, he said.

Ruskin said he's considering lifting his year-end forecast for $1.30 per euro after today's report.

The dollar reached a one-month high against the yen this week after the Fed's May 10 minutes showed the central bank may still raise rates this month.

``Recent developments suggested that upside risks to inflation had risen somewhat since the time of the March meeting,'' the Federal Open Market Committee said in records of the May 10 session, released on May 31.

`Excuse to Pause'

``The Fed takes away from this that they have an excuse to pause if they want to,'' said Lara Rhame, a currency strategist at Credit Suisse Holdings in New York. ``The knee-jerk reaction: it's a dollar negative.''

She forecasts a dollar decline to 110 yen in three months.

Interest-rate decisions won't be a ``mechanical reaction'' to inflation or job figures and smaller employment gains can support sustained economic growth, Fed Bank of Chicago President Michael Moskow said today.

``Don't mistake uncertainty about the near-term policy path for any weakening in our resolve to achieve price stability and sustainable growth,'' Moskow said in prepared remarks in Chicago.

U.S. factory orders fell 1.8 percent in April, a government report showed today. Manufacturing growth slowed last month, a private industry report showed yesterday. The same report showed manufacturers paid more for their purchases for a third straight month in May, adding to the case for further rate increases to stem inflation.

Yield Gap

``The crucial expectation is that growth is to slow in the second half of the year,'' said Kamal Sharma, a currency strategist at Bank of America Corp. in London. ``It weighed on the dollar across the board.''

He said the dollar may fall to $1.33 per euro and 105 yen within six months.

Ten-year U.S. Treasuries yield 1.06 percentage points more than 10-year German government debt, down from a difference of 1.19 percentage points in May, which was the most since October. U.S. 10-year notes yielded 3.09 percentage points more than 10- year Japanese government debt, compared with 3.29 points on May 31.

The dollar may also decline on concern the U.S. needs a weaker currency to shrink the U.S. trade gap. The deficit in the U.S. current account, the broadest measure of trade, surpassed $800 billion last year for the first time.

Traders sold dollars yesterday after the European Central Bank said yesterday in its semi-annual review of financial stability that the currency may face ``considerable downward pressure,'' because of the trade shortfall.

``The dollar's downward trend will continue,'' said Hiroyasu Hirayama, head of foreign exchange at BNP Paribas in Tokyo. ``The U.S. will be forced to take a weaker-dollar policy'' to close its trade gap.

To contact the reporter on this story: Deborah Finestone in New York at dfinestone@bloomberg.net; Michael McDonald in New York at mmcdonald10@bloomberg.net

Last Updated: June 2, 2006 17:15 EDT