London, Nov. 5 (Bloomberg) -- The dollar fell, reaching a 3 1/2-month low against the euro, amid speculation about whether the Federal Reserve will cut U.S. interest rates tomorrow. The U.S. currency weakened to $1.0022 per euro at 9:50 a.m. in London, from 99.57 cents late yesterday. The euro rose to as much as $1.0038, the highest level since July 26, when it traded at $1.0066. The dollar fell to 121.71 yen, from 122.44.
``We're negative on the dollar and we don't think the Fed's going to be that helpful,'' said Haydn Davies, chief economist at Barclays Global Investors Ltd., which manages about 580 billion pounds ($907 billion). There's a risk ``the market will be disappointed, because it's looking for a rate cut as the next piece of good news.'' A Bloomberg survey of 133 economists shows that 71 expect the Fed to cut the overnight rate by 25 basis points to 1.50 percent, the lowest level since July 1961. Seventeen expect a 50 basis- point cut to 1.25 percent and 45 expect rates to remain unchanged. A basis point is 0.01 percentage point.
The dollar last week had the biggest gain against the euro in 3 1/2 months as reports showing weakening growth heightened expectations the Fed may trim lending costs by as much as 50 basis points tomorrow. ``The market's gone too far in assuming a rate cut's 100 percent certain,'' said Neil Mellor, a currency strategist at Bank of New York. Recent gains on speculation for lower rates have been ``excessive.''
ISM
While economic reports Friday showed that, for a second month the jobless rate increased and a manufacturing index contracted, the figures weren't as bad as the median forecasts of economists surveyed by Bloomberg News. The reports may not have shown growth slowing enough to cement expectations for a Fed cut tomorrow, some analysts said. The Institute for Supply Management, an organization of purchasing executives, will probably report at 3 p.m. that its index of services expanded in October at a slower pace than in September.
A Bloomberg News survey predicts the index will decline to 52 from 53.9. Readings above 50 signals more companies report their business expanded, while those below 50 point to declines. In Europe, an index of service industries compiled by NTC Research for Group Plc rose to 50.1, compared with 49.1 in September. A reading above 50 indicates expansion; below 50 a contraction.
Although there are signs European growth may be weakening, ``the European Central Bank isn't looking as if it's going to cut rates,'' Davies at Barclays Global Investors Ltd. This view means ``the euro's our favorite currency.'' < br> U.S. Elections
Only five of the 22 economists surveyed by Bloomberg News expect the ECB to lower its main refinancing rate from 3.25 percent when policy makers meet on Thursday. Thirteen expect a reduction by the end of the year. Demand for the dollar was also suppressed before elections for the Senate and the House of Representatives to determine the leadership of Congress, some analysts said.
The political battle between Republicans and Democrats for control of the U.S. Senate comes down to a contest for six states where polls show the outcomes are too close to call as voting begins today. Polls show Republicans are poised to retain control of the House of Representatives, where all 435 members are up for re-election. ``It looks a bit more negative for the dollar,'' said Rob Hayward, a strategist at ABN Amro. ``The risks are that, if the Democrats get control, it would make it more difficult for the (George W.) Bush administration to push through new legislation, and undermine the belief that the U.S. is able to respond quickly to crisis.''
In other trading, British pound rose to $1.5639, from $1.5567, while the dollar fell to 1.4583 against the Swiss franc, compared with 1.4692. //www.quote.bloomberg.com