Oct. 3 (Bloomberg) -- The dollar fell against the yen, headed for a third weekly loss, before a government report that will probably show the deepening credit crunch contributed to the biggest drop in employment in more than five years.

The currency also fell against the euro on speculation the U.S. economy will weaken regardless of whether lawmakers pass a bill to buy troubled assets from banks in a vote today. The dollar retreated from the highest in more than a year against the currencies of the U.S.'s six major trading partners.

``The dollar will come under pressure if the unemployment report turns out to be much worse than expected,'' said Kamal Sharma, a currency strategist in London at JPMorgan Chase & Co. ``Having said that, the dollar has been resilient. Recent numbers out of the U.S. recently were horrific, but data from elsewhere looked equally bad. You will need an exceptionally weak payrolls number to take the dollar significantly lower.''

The dollar weakened to 105.14 yen as of 6:27 a.m. in New York, from 105.33 yesterday. It fell to $1.3866 per euro, from $1.3819 yesterday, when it touched a one-year high of $1.3748. The euro was at 145.77 yen from 145.55 yen, after touching 144.57, the lowest level since June 2006.

U.S. employers probably eliminated 105,000 jobs last month, after slashing 84,000 in August, according to the median forecast of economists surveyed by Bloomberg News. The Labor Department's report is due at 8:30 a.m. in Washington. The unemployment rate held at a five-year high of 6.1 percent, according to a separate survey.

Rate-Cut Chance

``There's a high chance the dollar falls against the yen,'' Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader, wrote in a research note today. ``The market is likely to price in bad jobs numbers and the chance of a Fed rate cut. We're in the middle of a string of disappointing economic data.''

Futures on the Chicago Board of Trade yesterday showed a 94 percent chance the Fed will cut its 2 percent target rate for overnight lending between banks by a half-percentage point on Oct. 29, with the balance of bets on a quarter-point reduction. Futures showed no chance of lower rates a month ago.

The U.S. Dollar Index traded on ICE futures in New York slipped to 80.265, from 80.439 yesterday, when it reached 80.794, the highest since Sept. 5, 2007.

The New Zealand dollar rose the most against the U.S. currency today, gaining 1 percent to 66.31 U.S. cents. The Australian dollar advanced 0.8 percent to 77.86 U.S. cents.

U.S. Bank Bill

The U.S. House of Representatives will vote on the latest version of a $700 billion bank rescue plan at about 12:30 p.m. in Washington. The Senate voted 74-25 on Oct. 1 in favor of legislation that links the rescue of the financial industry to an increase in bank-deposit insurance limits and tax breaks after the House rejected an earlier version of the bill.

The euro was still set for a record weekly drop against the dollar after European Central Bank President Jean-Claude Trichet said yesterday policy makers discussed cutting the benchmark interest rate before holding it at 4.25 percent. The 15-nation currency declined 5.1 percent versus the dollar, the biggest weekly drop since its debut in January 1999. It fell 5.8 percent against the yen, the biggest weekly decline since March 2000.

Investors should sell the euro at 145 yen with a target of 135 yen after the ECB signaled it may lower borrowing costs for the first time in five years, Morgan Stanley said.

``Growth prospects in the eurozone are dimming quickly and may force the ECB's easing hand sooner rather than later,'' New York-based Sophia Drossos and Yilin Nie, strategists at Morgan Stanley, wrote in a research note yesterday.

European Bailouts

European economies face ``increasing downside risks,'' Trichet said at a Frankfurt press conference following the decision to keep borrowing costs on hold. Five European banks including Dexia SA, the world's biggest lender to local governments, and Fortis, Belgium's largest financial-services firm, have accepted state-backed bailouts this week.

The implied yield on the Euribor futures contract expiring in March fell to 4.11 percent, from 4.77 percent a month ago. The Euribor contract averaged 44 basis points, or 0.44 percentage point, higher than the ECB's overnight target during the past two years, Bloomberg data show.

``The euro is likely to depreciate further against the yen,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third-biggest lender. ``The ECB may begin easing policy next month. The focus is moving to European financial instability.''

Implied volatility on one-month euro options against the yen was at 20.04 percent, near the highest in more than eight years on concern the credit-market crisis will deepen. Volatility reached 21.04 percent, the most since March 2000. Higher volatility may discourage so-called carry trades as it indicates a larger risk of exchange-rate fluctuations.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net;

Last Updated: October 3, 2008 06:39 EDT