Nov. 3 (Bloomberg) -- The dollar advanced to the strongest level versus the euro in a month and the yen climbed as evidence banks are struggling to shake off the effects of the financial crisis reduced demand for higher-yielding assets.

The U.S. currency strengthened on speculation Federal Reserve policy makers are discussing the outlook for record-low borrowing costs at their two-day meeting. South Africa’s rand rose against all of its 16 most-traded counterparts tracked by Bloomberg as gold surged to a record high.

“When risk appetite falters, the dollar still catches a bid,” said Steven Pearson, the London-based head of G-10 currency strategy at Bank of America Corp., in a Bloomberg Television interview. “That is likely to remain the case for the foreseeable future as the dollar remains the defensive currency of choice.”

The dollar appreciated 0.4 percent to $1.4716 per euro at 4:12 p.m. in New York, from $1.4775 yesterday. It touched $1.4626, the strongest since Oct. 5. The dollar gained 2.4 percent since reaching a 14-month low on Oct. 26. The greenback will weaken to $1.50 by year-end, according to Bank of America. The yen climbed 0.3 percent to 132.94 per euro, from 133.32. The dollar traded at 90.35 per yen, compared with 90.21.

Norway’s krone dropped 0.4 percent to 5.775 per dollar and Mexico’s peso fell 0.2 percent to 6.811 yen as the outlook for major banks encouraged investors to reduce the carry trade, in which they sell the currency of a nation with low borrowing costs and buy assets where returns are higher.

UBS’s Loss

UBS AG, the largest Swiss bank, reported a third-quarter net loss of 564 million Swiss francs ($550 million), bigger than analysts had estimated.

Implied volatility on major currencies climbed to 14.27 percent, the highest level since July 13, according to data compiled by JPMorgan Chase & Co., indicating traders predict wider price swings in coming months. Higher volatility, a sign of economic uncertainty, undermines the carry trade by making profit from interest-rate differentials less predictable.

The benchmark lending rates of 0.1 percent in Japan and as low as zero in the U.S. make the yen and dollar targets for investors seeking to fund the carry trade. The Fed will release its monetary policy statement tomorrow.

The dollar will weaken to $1.55 per euro by year-end, according to Deutsche Bank AG, the world’s largest currency trader. It previously predicted a decline to $1.50. The dollar will rebound next year, appreciating to $1.45 by the end of June, London-based currency strategists Bilal Hafeez and Daniel Brehon wrote in a research note today.

Capital Outflows

For the dollar, low interest rates in the U.S. and capital outflows are offsetting cheap valuation and a narrowing U.S. trade deficit, according to the analysts.

“The stars have yet to fully align for a clear dollar uptrend,” they wrote.

Sterling was little changed against the dollar after two days of declines as investors speculated the Bank of England will extend its 175 billion pound ($286 billion) asset-buying program after its Nov. 5 meeting.

“The market’s expectations are for a 25 billion sterling extension of the program, but some speculation in the market is building that it will be extended by as much as 50 billion sterling,” said Ian Stannard, a foreign-exchange strategist in London at BNP Paribas SA, France’s largest bank, in an interview on Bloomberg Radio.

The pound fell earlier as much as 0.9 percent as Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc said they will receive 31.3 billion pounds in a second bailout from Britain’s government.

Sterling later traded at $1.6399, compared with $1.6408, and advanced 0.4 percent to 89.68 pence per euro.

Gain in Rand

The rand increased 1.5 percent to 7.8532 per dollar as gold futures for December delivery climbed to a record $1,088.50 an ounce. India’s central bank bought 200 metric tons of the precious metal from the International Monetary Fund for $6.7 billion as a hedge against the greenback’s 4.6 percent drop versus the euro in 2009. South Africa is the world’s third- largest gold miner.

The Australian dollar erased its advance versus the U.S. currency after the Reserve Bank said it’s “prudent to lessen gradually” the stimulus to the economy provided by low borrowing costs. Policy makers raised the cash target by a quarter-percentage point to 3.50 percent, matching the median forecast of 22 economists in a Bloomberg survey.

‘Some Guidance’

“There was some guidance given but not strong guidance on future decisions, but we do expect further rate increases to come from the central bank,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia. “Any pullback in the currency would be a buying opportunity.”

Investors should sell the Australian dollar against its Canadian counterpart, betting it will weaken to 94.90 Canadian cents, Standard Bank Plc said.

The trade should be abandoned if the Aussie strengthens to 98.50 Canadian cents, Steven Barrow, head of G-10 research in London, wrote today in a report.

The Australian dollar declined 1 percent to 96.25 Canadian cents. The Aussie dropped 0.2 percent to 90.25 U.S. cents and was little changed at 81.55 yen.

To contact the reporters on this story: Ruby Madren-Britton in New York at rmadrenbritt@bloomberg.net; Matt Townsend in New York at mtownsend9@bloomberg.net

Last Updated: November 3, 2009 16:14 EST