Dec. 3 (Bloomberg) -- The euro traded near a one-week low against the dollar on bets the European Central Bank will cut borrowing costs by a half-percentage point tomorrow.

The yen fell against the dollar and the euro after stocks erased losses, prompting speculation that investors will sell higher-yielding assets and pay back low-cost loans in Japan at a slower pace. The pound dropped against the yen, the dollar and the euro as services in the U.K. shrank at the fastest rate in at least 12 years and consumer sentiment fell.

“Europe is in very tough shape, and the European rates have to come down,” said Jonathan Clark, vice chairman in New York of FX Concepts Inc., a hedge fund that manages $14.6 billion in currencies. “It makes perfect sense to me that the dollar goes up.”

The euro traded at $1.2713 at 4:16 p.m. in New York, compared with $1.2714 yesterday. It touched $1.2563 yesterday, the lowest level since Nov. 21. The yen fell 0.2 percent to 118.68 versus the euro from 118.44. Japan’s currency dropped 0.2 percent to 93.39 per dollar from 93.18. It touched 92.54, the strongest level since Oct. 28.

Canada’s dollar dropped as much as 1.6 percent, the most in almost two weeks, as Prime Minister Stephen Harper threatened to suspend Parliament to stave off defeat at the hands of a united opposition. The loonie depreciated to C$1.2571 per U.S. dollar from C$1.2463 yesterday.

Sterling fell as much as 1.7 percent to $1.4666, the lowest level since Nov. 17, and dropped 0.9 percent to 85.99 pence per euro on evidence of a weakened British economy.

U.K. Services

An index based on a survey of about 700 U.K. service companies dropped to 40.1, the lowest since the gauge began in 1996, Markit and the Chartered Institute of Purchasing and Supply said today. Consumer confidence fell to the lowest level since at least 2004, Nationwide Building Society said.

“People long on the euro, long on sterling just got hammered,” said Lane Newman, director of currency trading at ING Financial Markets LLC in New York, who is betting the yen and the dollar will extend their rallies. “They are throwing in the towel.” A long position is a wager an asset will gain.

The Bank of England will lower its main interest rate by one percentage point to 2 percent when it meets tomorrow, and the ECB will reduce its target to 2.75 percent, according to the median forecast of economists surveyed by Bloomberg News.

Japan’s currency has gained 20 percent versus the dollar, 38 percent versus the euro and 51 percent against the Canadian dollar this year, hurting Japanese exporters. A drop in the greenback by 1 yen reduces the annual operating profit of Canon Inc., the world’s biggest camera maker, by 2.6 billion yen ($28 million), the Tokyo-based company said in October.

Bank of Japan

Bank of Japan Governor Masaaki Shirakawa said this week at an economic forum in Fukuoka, Japan, that “abrupt fluctuations” of exchange rates are “undesirable.”

The yen surged to 90.93 per dollar on Oct. 24, the strongest level since 1995, when it touched a post-World War II high of 79.75. The Group of Seven nations intervened that year by buying the dollar to stabilize currency markets.

“This is the kind of market that will eventually push to the point where it feels out the BOJ’s pain threshold, which I suspect is somewhere near 90,” wrote Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut, in a research note today.

U.S. companies eliminated 250,000 jobs in November, the most since the aftermath of the 2001 terror attacks, ADP Employer Services reported today. The Labor Department’s November jobs report, due Dec. 5, may show a payroll reduction of 330,000, according to the median forecast of 70 analysts surveyed by Bloomberg News.

Weakness in U.S.

The Institute for Supply Management said its index of U.S. non-manufacturing businesses, which make up almost 90 percent of the economy, fell to 37.3, the lowest level since records began in 1997. Readings below 50 indicate a contraction.

The Standard & Poor’s 500 Index gained 2.6 percent after losing as much as 2.5 percent. More than $32 trillion has been erased from the value of global equities since the U.S. mortgage market’s collapse sparked financial turmoil.

“We still get poor economic data, and you’ve got to think there’s danger there,” said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. “Until we get stabilization in both financial markets and economic data, it’s difficult to see any significant reversal of the gains in the yen.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Jamie McGee in New York at jmcgee8@bloomberg.net

Last Updated: December 3, 2008 16:22 EST