(Bloomberg) -- The dollar rose against most of its major counterparts as UBS AG Chief Executive Officer Oswald Gruebel said markets are “extremely unstable,” encouraging demand for the safety of the world’s main reserve currency.

The greenback climbed against the Australian and New Zealand dollars and the Norwegian krone as Switzerland’s biggest bank said it will cut another 7,500 jobs. The euro erased losses versus the yen after European Central Bank council member Axel Weber said cutting the benchmark interest rate below 1 percent risks bringing lending between banks to a standstill.

“We have seen spectacular rallies across several asset classes, while evidence of an improvement on the real economic front is lagging and clearly investors remain cautious,” said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt. “Things will get worse before they get better.”

The dollar increased 0.5 percent to $1.3195 per euro at 7:54 a.m. in New York, from $1.3259 yesterday. The U.S. currency rose 0.5 percent to 99.43 yen from 98.98. The euro was little changed at 131.20 yen after dropping to 129.93, the lowest level since April 1.

Currency options indicate traders are the most optimistic in almost four years on the prospects for the pound against the euro.

Traders are paying a 0.25 percentage-point premium for one- week call options on the pound relative to puts, according to data compiled by Bloomberg. Call options grant the right to buy an asset while put options give the right to sell. The difference, or risk-reversal rate, favored euro puts from March 9, 2007, through April 3 this year.

Pound’s Gains

The pound appreciated 0.9 percent to 88.21 pence per euro and gained 0.6 percent to $1.4979.

Investors reduced holdings of higher-yielding assets before U.S. data that may add to evidence the economy may not recover anytime soon.

U.S. industrial output declined 0.9 percent last month, according to a Bloomberg News survey before the Federal Reserve report today. The Fed Bank of New York’s Empire State index of manufacturing, also due today, was minus 35 in April, a 12th month of contraction, a separate Bloomberg survey showed.

The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, was little changed at 84.61.

The MSCI World Index of shares fell for the second day and the Nikkei 225 Stock Average declined 1.1 percent. The MSCI benchmark gained 20 percent since the beginning of March. Futures on the Standard & Poor’s 500 Index were little changed.

‘We Are Negative’

“We are negative on equity sentiment over the short term and accordingly, expect euro-dollar to trade lower,” Ashley Davies, a Singapore-based currency strategist at UBS, said in a research note today.

Foreign direct investment into China dropped 9.5 percent to $8.4 billion in March from a year earlier, the Commerce Ministry said in Beijing today. That compares with a 15.8 percent decline in February.

Volatility implied by one-month Australian dollar options against the yen rose to 29.9 percent from 29.2 percent yesterday, indicating a greater risk of exchange-rate fluctuations that can erode profit on so-called carry trades.

In carry trades, investors get funds in a country with relatively low borrowing costs and invest in another with higher interest rates. The risk is market moves can erase those profits. The benchmark interest rate is 0.1 percent in Japan, compared with 3 percent in Australia and in New Zealand.

U.S. Retail

The yen rose the most in four weeks against the dollar yesterday after the Commerce Department said U.S. retail sales unexpectedly fell 1.1 percent in March, after rising a revised 0.3 percent in the previous month.

“Sooner rather than later pessimism will return to the market,” said Toru Umemoto, chief currency strategist in Tokyo at Barclays Capital, the world’s third-largest foreign-exchange trader. “The yen will be the beneficiary.”

The euro weakened yesterday as Standard & Poor’s said leveraged buyouts may help push corporate defaults in Europe to a record 14.7 percent this year.

“The S&P report renews concern over possible defaults at financial institutions in Europe,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “It would be negative for the euro.” The euro may weaken to $1.3180 and 130 yen today, he said.

Expectations for a weaker dollar increased to the highest level in a year after the Fed diluted the currency to lift the economy out of a recession, a survey of Bloomberg users showed.

Participants turned bearish on the dollar over the next six months for the first time since January, according to 1,349 respondents from Paris to New York in the Bloomberg Professional Global Confidence Index.

They were most bullish on Brazil’s real since August and expected the Mexican peso to rally for the first time since January, as the Group of 20 nations pledged on April 2 to spend $1 trillion to revive global economic growth.

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net