(Bloomberg) — The euro had its biggest weekly drop in three months as traders speculated the European Central Bank will slow the pace of its interest-rate increases, after lifting borrowing costs this week for the sixth time in a year.The 12-nation currency stalled after setting a 20-month high earlier against the dollar as the central bank lowered its estimates for inflation in 2007. ECB President Jean-Claude Trichet refrained from using the term “strong vigilance,” which he’d used in the past to signal more rate boosts.

“There was some disappointment over Trichet’s press conference,” said Paresh Upadhyaya, who helps manage $29 billion in currency assets at Putnam Investments in Boston. “We needed to see something more hawkish to send the euro higher.”

The euro dropped 1 percent this week to $1.3203. It touched $1.3367 on December 4, the highest since March 2005. The currency dropped 0.25 percent, the most in three months, to 153.58 yen, and set a record high of 154.18 yen. The dollar rose the most since September against the yen, gaining 0.8 percent to 116.33 yen.

The ECB lifted its benchmark a quarter-percentage point to 3.5 percent on December 7 to stem inflation in the region.

Inflation may range between 1.5 percent to 2.5 percent next year, down from 2.1 percent to 2.3 percent this year, the ECB said. The bank had previously estimated inflation of 1.9 percent to 2.9 percent for next year.

The dollar rebounded from near a 20-month low as government figures showed the US economy added 132,000 jobs in November after a gain of 79,000 workers a month earlier. The median forecast in a Bloomberg News survey was for 100,000 new jobs. The jobless rate rose to 4.5 percent last month from a five-year low of 4.4 percent in October.

“The economy is still robust,” said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. “It’s a dollar friendly number; this number is absolutely consistent with the Fed sitting comfortably on hold.”

The Federal Reserve kept its benchmark at 5.25 percent the past three meetings, after two years of rate increases. The bank next sets rates on December 12.

Traders in interest-rate futures trimmed bets the Fed will cut borrowing costs by the end of March. Fed funds futures indicate traders see about a 40 percent probability the Fed will reduce rates to 5 percent before April, down from about 100 percent earlier this week.

The US currency also got a boost after US Treasury Secretary Henry Paulson said yesterday a “strong dollar” is in the US interest. Paulson, speaking in an interview with CNBC, also said the economy is growing at a “sustainable” pace.

Paulson’s comments “reinforced some confidence in the US economy,” said Naomi Fink, senior currency strategist at BNP Paribas SA in New York.

Ten-year US Treasury notes yielded 2.86 percentage points more than similar-maturity Japanese government bonds. The difference widened about 1 basis point this week, after shrinking at one point to 2.82 percentage point, the narrowest this year.

“Higher yields in the US are supporting the dollar,” said Brian Garvey, senior currency strategist in Boston at State Street Global Markets.

Japan’s economy expanded at an annualised 0.8 percent rate in the three months to September 30, the Cabinet Office said yesterday, less than the 2 percent estimated last month.

Machinery orders climbed 2.8 percent from a month earlier, the Cabinet Office said, compared with a 6.2 percent forecast in a Bloomberg survey.

That “probably took a rate hike off the table,” said Scott Schultz, a currency trader at Brown Brothers Harriman & Co. in New York.

The Bank of Japan raised rates in July for the first time in almost six years, to 0.25 percent, and meets next to set rates on December 18.