Nov. 4 (Bloomberg) -- The dollar fell the most versus the euro in two months as the Federal Reserve reiterated its pledge to keep borrowing costs near zero even as its $1 trillion injection into the economy helps revive growth.

Traders pared expectations for policy makers to increase borrowing costs in the first quarter of 2010. South Africa’s rand rose against all of its major counterparts for a second day as gold climbed to a record. Norway’s krone advanced for the first time in four days after crude oil rose above $81 a barrel.

“The Fed appears to be more cautious,” said Todd Elmer, currency strategist at Citigroup Inc. in New York. “The ultimate outcome is dollar-negative as it gave a small boost to the risk appetite.”

The dollar slid as much as 1.2 percent, the biggest intraday decline since Sept. 8, before trading at $1.4878 per euro at 4:13 p.m. in New York, compared with $1.4724 yesterday. It touched $1.4909, the weakest level since Oct. 27. The euro increased 1.6 percent to 135.08 yen, from 133.01. The dollar advanced 0.4 percent to 90.73 yen, from 90.33.

The Fed restated its intention to keep interest rates “exceptionally low” for “an extended period” as long as inflation expectations are stable and unemployment fails to decline. Policy makers held the target rate for overnight lending between banks at zero to 0.25 percent, a decision expected by all 96 economists in a Bloomberg survey.

“Leaving the reference to ‘extended period’ should open the door to further dollar weakness,” currency strategists Camilla Sutton and Sacha Tihanyi at Scotia Capital Inc. wrote in a research note to clients today. “Today’s statement is in line with our view that the Fed remains on hold until” the third quarter in 2010, they wrote.

Dollar Index

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, decreased 0.9 percent to 75.711.

The gauge fell about 15 percent from a three-year high reached in March, dropping on speculation the Fed will trail other central banks in raising borrowing costs. The index decreased to a 14-month low of 74.94 on Oct. 21.

Interest-rate futures showed a 27 percent chance that policy makers would raise the target lending rate by at least a quarter-percentage point by the March meeting. A week ago the likelihood was 34 percent.

Deutsche Bank AG, the world’s largest currency trader, lowered its forecast for the dollar yesterday, predicting it would weaken to $1.55 per euro by year-end. Its previous estimate was for a slide to $1.50, which matched the median forecast of 48 analysts in a Bloomberg survey.

Labor Market

Policy makers are reluctant to raise rates until the labor market shows signs of recovery, even though a report last week showed the world’s largest economy resumed growth after 12 months of contraction.

U.S. employers eliminated 175,000 jobs in October after a reduction of 263,000 in the previous month, according to the median forecast of 84 economists in a Bloomberg survey. The unemployment rate may rise to 9.9 percent, from 9.8 percent. The Labor Department’s report is due Nov. 6.

The dollar may be headed for a period of rebound as the rally in stocks, commodities and other high-yielding assets exhausts itself as the end of the year approaches, according to Mark Dow, a money manager at Pharo Management LLC, a hedge fund based in New York that has $2 billion under management.

“The Fed statement was as good as it could possibly have been for risk taking,” Dow said. “If the market does not respond well, it does not paint a pretty picture about market positioning and psychology.”

Stocks Pare Gain

U.S. stocks almost erased a surge that had sent the Standard & Poor’s 500 Index up as much as 1.5 percent. The S&P 500 ended the day up 0.1 percent.

New York University Professor Nouriel Roubini told CNBC today before the Fed’s statement that the dollar may reverse its slump by rallying as much as 20 percent six months from now.

Roubini, who warned about the coming financial crisis in 2006, said investors are executing the “mother of all carry trades” by borrowing dollars to buy commodities and emerging- market assets for higher returns. When the boom turns to bust, the U.S. currency will quickly reverse losses, he said.

To buy protection against an appreciation in the dollar versus the euro, options traders are paying the biggest premiums since December.

The one-month 25-delta risk-reversal rate for the euro versus the dollar fell to minus 1.11 percent today, the lowest level since Dec. 10. A negative reading indicates traders pay more to buy euro puts, or the right to sell the currency, than for calls, or the option to buy the currency.

Stronger Pound

Sterling rose 0.9 percent to $1.6583 as Markit and the Chartered Institute of Purchasing and Supply said a gauge of service industries rose in October to 56.9, the highest level since August 2007.

The Bank of England’s Monetary Policy Committee will boost asset purchases tomorrow by 50 billion pounds ($82 billion) to 225 billion pounds, according to the median forecast of 48 analysts in a Bloomberg survey.

Britain’s central bank will hold its main rate at an all- time low of 0.5 percent, according to all of the 60 economists in a Bloomberg survey. The European Central Bank, which maintains a 1 percent main refinancing rate, also announces its policy decision tomorrow.

The rand rallied, advancing 2.5 percent to 7.6437 per dollar as gold futures for December delivery reached a record $1,096.50. Traders speculated that central banks and investors will purchase the precious metal to hedge against the dollar’s 5.8 percent drop versus the euro this year.

South African Stance

South Africa’s currency also advanced as Reserve Bank Deputy Governor Daniel Mminele said in a copy of a speech posted on the bank’s Web site yesterday that policy makers will continue accumulating reserves without intervening in the foreign-exchange market.

Finance Minister Pravin Gordhan said on Oct. 28 that the government may “massage” the rand because it’s too strong. Central banks intervene by buying or selling currencies to influence exchange rates.

The krone gained 1.8 percent to 5.6740 per dollar as crude oil, Norway’s biggest export, climbed as much as 1.8 percent to $81.06 a barrel. The currency gained 14 percent over the past six months as commodity prices increased.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net

Last Updated: November 4, 2009 16:20 EST