Nov. 4 (Bloomberg) -- The dollar may extend its gain versus the euro after reaching a one-month high 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 yesterday 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 major 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 traded at $1.4723 per euro at 7 a.m. in Tokyo, after advancing 0.4 percent yesterday and touching $1.4626, the strongest level since Oct. 5. The dollar gained 2.5 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 was at 133 per euro, following a 0.2 percent gain. The dollar fetched 90.33 per yen, after rising 0.1 percent.

Norway’s krone slid 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, Switzerland’s largest bank, reported a third- quarter net loss of 564 million Swiss francs ($550 million), bigger than analysts had estimated. Wealthy clients’ redemptions accelerated.

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 today at the end of a two-day meeting. Policy makers may say they are more optimistic about the economic outlook while repeating their pledge to leave the benchmark interest rate near zero for an “extended period.”

Deutsche Bank’s View

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 yesterday.

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 Deutsche Bank 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 meeting tomorrow.

“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, in an interview on Bloomberg Radio.

U.K. Bank Bailout

The pound fell as much as 0.9 percent yesterday 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 the British government.

Sterling later traded at $1.6409, compared with $1.6408, and gained 0.5 percent to 89.65 pence per euro.

The rand increased 1.4 percent to 7.8550 per dollar as gold futures for December delivery climbed to a record $1,088.50 an ounce yesterday. 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 5.1 percent drop versus the euro in 2009. South Africa is the world’s third- largest gold miner.

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 17:08 EST