By Anna Rascouet Nov. 3 (Bloomberg) -- The yen advanced as stocks fell on evidence banks are struggling to shake off the effects of the global recession, damping demand for higher-yielding currencies. The yen gained most against the Australian dollar and the Norwegian krone after UBS AG reported a wider-than-estimated loss, sending the MSCI World Index down 1.1 percent. The rand climbed against all 16 most-traded currencies tracked by Bloomberg as gold traded within 0.5 percent of a record high. The Aussie tumbled as the central bank raised interest rates without signaling faster increases to come. “What we are seeing is position squaring at the back of the bank news and risk aversion,” said Michael Klawitter, a currency strategist at Commerzbank AG in Frankfurt. The yen appreciated to 131.81 per euro as of 6:17 a.m. in New York, from 133.32 yesterday. It was little changed at 90.16 yen per dollar. The South African rand traded at 7.9413 per dollar, from 7.9653. The Australian dollar dropped to 89.32 U.S. cents, from 90.40. Gold futures in India and Dubai surged to records today after the International Monetary Fund said it sold 200 metric tons of bullion to the Reserve Bank of India for about $6.7 billion. The Washington-based lender agreed in September to sell 403.3 tons of gold as part of a plan to shore up its finances and lend at reduced rates to low-income countries. Gold fell 0.3 percent to $1,056.24 an ounce, after rising to $1066.35 earlier. It reached a record $1,070.80 an ounce in London on Oct. 14. Fed Meets The dollar weakened against the yen before the Federal Reserve releases its monetary policy statement tomorrow at the conclusion of its rate meeting. The central bank in its previous meeting retained a commitment to keep borrowing costs near zero for an “extended period.” Rate expectations in the U.S. “suggest growing confidence in the markets that the ‘‘extended period’’ phrase in the FOMC statement will not be tinkered with this week,” Derek Halpenny, European head of global currency research in London, wrote in an e-mailed report today. “The dollar is at the mercy of the FOMC statement released tomorrow and therefore remains vulnerable to “extended period” being maintained.” The U.S. banking system is still “far from robust,” hurt by a decline in commercial real-estate values and threatened by rising prospects for defaults on such loans, Jon Greenlee, associate director of the Fed’s Division of Banking Supervision and Regulation in Washington, said yesterday in testimony to a House Oversight subcommittee hearing in Atlanta. Aussie Slides The Australian dollar erased its advance versus the U.S. currency after the Reserve Bank of Australia said it was “prudent to lessen gradually” the stimulus to the economy provided by low borrowing costs. Policy makers raised their main rate by 0.25 percentage point to 3.50 percent, as economists had forecast. “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.” Benchmark interest rates are 3.5 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency-market moves will erase profits. UBS’s third-quarter net loss was 564 million Swiss francs ($550 million), compared with a 283 million-franc profit a year earlier, the Zurich-based bank said today. Analysts surveyed by Bloomberg estimated a loss of 337 million francs. Pound Drops The pound declined against the dollar as investors speculated the Bank of England will extend its asset-buying program this week days and Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc said they will receive 31.3 billion pounds in a second government bailout. U.K. policy makers will decide to expand bond purchases by 50 billion pounds ($82 billion) to 225 billion pounds at their Nov. 5 meeting, a Bloomberg survey of economists showed. The pound slid to $1.6305, from $1.6408. It was at 89.81 pence per euro, from 90.05 pence. To contact the reporters on this story: Anna Rascouet in London at arascouet@bloomberg.net

Source