Dec. 16 (Bloomberg) -- The euro fell from near a two-month high against the dollar as reports showed that European manufacturing and service industries contracted at the fastest pace in at least a decade.

The currency shared by 15 European nations also slid as the European Central Bank President Jean-Claude Trichet said there’s a limit to how far the bank can cut interest rates and signaled it may pause in January. The dollar was near the weakest level in 13 years against the yen on expectations that the Federal Reserve will reduce the target interest rate for overnight lending to a record low today and may announce plans to buy U.S. debt to push down Treasury yields.

“The euro may lose some of its gains,” said Daragh Maher, a London-based currency strategist for Calyon, the investment- banking arm of Credit Agricole SA. “Euro-zone data served as a reminder that Europe faces the same problems, while policy makers have been slower than in the U.S.”

The euro fell to $1.3647 per dollar at 11:20 a.m. in London, from as high as $1.3737, the strongest level since Oct. 14. It traded at $1.3688 yesterday in New York. The dollar was at 90.04 yen from 90.65 yen. It dropped to 88.53 yen on Dec. 12, the lowest level since August 1995. The euro was at 122.89 yen from 124.09 yen.

The pound fell to 89.61 pence per euro, from 89.43 pence yesterday, when it reached 90.21 pence, the weakest level since the 15-nation currency’s 1999 debut. Sterling also declined to $1.5231 from $1.5306.

Economic Woes

A composite index of both manufacturing and service industries in Europe dropped to 38.3, the lowest since the survey began in 1998, from 38.9 in November. Economists forecast a decline to 37.8, according to the median of 16 estimates in a Bloomberg survey. The index is based on a survey of purchasing managers by Markit Economics in London and a reading below 50 indicates contraction.

“Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes,” Trichet told journalists in Frankfurt late yesterday. The comments were embargoed until now. Asked whether the bank will refrain from a further rate reduction next month, Trichet said policy makers want to “concentrate at this stage on getting what we already decided to be really operational.”

The ECB has lowered its key rate three times since October to 2.5 percent to contain fallout from the global financial crisis. Investors are betting the economic slump will force the ECB to slice a further 50 basis points off its key rate at its next policy meeting on Jan. 15, Eonia forward contracts show.

U.S. Slump

Futures on the Chicago Board of Trade showed a 68 percent chance the Fed will trim its 1 percent target rate for overnight lending between banks today to an all-time low of 0.25 percent, compared with zero odds a month ago. The U.S. central bank has limited room to lower interest rates and may use less conventional policies, such as buying Treasuries, Chairman Ben S. Bernanke said on Dec. 1.

The U.S. housing slump that triggered the credit crisis and recession shows no signs of abating. New-home starts in November dropped to a 736,000 annual pace, the lowest level since records began in 1959, the Commerce Department is forecast by economists to report today before the Fed’s decision.

U.S. President George W. Bush’s administration is moving with “deliberative speed” in considering possible financing for U.S. automakers, Treasury Secretary Henry Paulson said yesterday in an interview with Fox News and Fox Business Network, according to an e-mailed transcript. General Motors Corp. and Chrysler LLC may be only weeks from insolvency, the companies said in congressional hearings on Dec. 4 and Dec. 5.

The U.S. currency gained 6.5 percent against the euro this year, 30 percent versus the British pound and 25 percent versus the Canadian dollar as investors bought the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit.

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net

Last Updated: December 16, 2008 06:24 EST