Oct. 4 (Bloomberg) -- The dollar fell against the euro and yen for the first time in four days as a drop in U.S. factory orders suggested the housing recession is slowing the economy.

The U.S. currency rose earlier against the euro after the European Central Bank held its benchmark lending rate at 4 percent and ECB President Jean-Claude Trichet signaled policy makers aren't likely to raise borrowing costs soon.

``The report on factory orders provided a reason for dollar bears to get back into the market,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research.

The dollar decreased 0.3 percent to $1.4137 per euro at 4:16 p.m. in New York. The U.S. currency fell 0.2 percent to 116.54 yen. The euro traded at 164.74 yen.

The New York Board of Trade's dollar index measuring its value against a basket of six major currencies including the euro and yen fell for the first time this week to 78.446. It touched 77.657 on Oct. 1, the lowest since the index started in March 1973.

Investors also sold the dollar against the euro after the U.S. currency failed to break $1.4065, a 23.6 percent retracement of its fall from the Aug. 16 intraday high of $1.3361 to the record low of $1.4283 set Oct. 1, according to Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc.

``The market got short on the euro through the ECB meeting but could not break support,'' Osborne said.

A short is a bet on a currency's decline. The so-called support level is tracked by investors using charts to show historical price patterns.

Factory Orders

Orders placed with U.S. factories fell a more-than-forecast 3.3 percent in August after a revised 3.4 percent increase in July that was smaller than previously estimated, the Commerce Department reported today in Washington.

``The U.S. economy is really not out of the woods yet,'' said Alan Kabbani, senior currency trader in Charlotte, North Carolina, at Wachovia Corp. ``The factory number reminded people of this.''

The number of workers filing first-time claims for unemployment benefits rose more than forecast last week, the Labor Department reported today. Applications increased to 317,000 in the week that ended Sept. 29 from a revised 301,000 the previous week.

The Labor Department will probably say tomorrow that U.S. employers added 100,000 jobs last month after a loss of 4,000 jobs in August, according to the median forecast of 83 economists surveyed by Bloomberg News.

Fed Rate Outlook

Interest-rate futures show traders see a 70 percent chance that the Fed will cut its 4.75 percent target rate for overnight lending between banks a quarter-percentage point at its Oct. 31 meeting. The likelihood was 88 percent a week ago.

The Frankfurt-based ECB held its key rate steady on concern the U.S. housing slump and a rising euro may curb the expansion of the euro zone's $10.4 trillion economy. Only one of 55 economists surveyed by Bloomberg News had forecast an increase to 4.25 percent.

``It remains necessary to gather additional information and examine new data before drawing further conclusions for monetary policy,'' Trichet said at a news conference in Vienna.

Trichet said that while the bank's outlook on growth ``has not been modified,'' he said ``downside risks'' had increased. He expected inflation to remain ``significantly'' above 2 percent the rest of this year and in early 2008 before moderating.

`Hands Are Tied'

``The ECB's hands are tied,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. Policy makers ``see a risk of inflation, but credit market conditions remain tight, and the economic outlook has deteriorated.''

The implied yield on December's Euribor futures contract fell 0.03 percentage point to 4.59 percent. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 0.16 percentage point above the ECB's key rate since 1999.

Trichet urged politicians to show ``verbal discipline'' when discussing the euro. Italian Prime Minister Romano Prodi said yesterday in Rome that he and German Chancellor Angela Merkel had spoken briefly and expressed concern over the 13- nation currency's strength.

The euro's appreciation is clearly ``an issue for Europe right now,'' Fed Governor Frederic Mishkin said today after presenting a research paper in Frankfurt.

The European politicians' comments have stoked expectations that policy makers of the ECB, the 27-member European Union and the Group of Seven nations will discuss currencies at meetings in Washington that begin Oct. 19.

The Bank of England today left its benchmark interest rate at 5.75 percent, a six-year high. The pound rose 0.4 percent versus the dollar.

To contact the reporters on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net; Min Zeng in New York at mzeng2@bloomberg.net.

Last Updated: October 4, 2007 16:20 EDT