LONDON—The euro rose to a one-week high in European trading Wednesday ahead of a key Finnish vote to approve changes to the currency bloc's rescue fund, the European Financial Stability Facility.
But the gains were tempered as the week's earlier optimism about a looming grand solution to the euro zone's debt crisis was checked in the absence of fresh news from Greece.
The single currency traded recently at the day's high at $1.3675 from $1.3589 late Tuesday in New York, and at ¥104.48 from ¥103.33. The pound was at $1.5662, compared with $1.5634.
The euro and other currencies deemed relatively risky, like the Australian dollar, retraced some of the gains made in late New York trading Tuesday but recovered as the European morning wore on, despite a less buoyant tone in Asian and European equity markets.
Analysts noted that markets were having to get real after two hope-filled rallies prompted by speculation that the European authorities might be considering their own version of the U.S. Troubled Asset Relief Program.
"Most of the rhetoric we have heard over the last couple of days runs counter to this new-found optimism," said Credit Agricole in a note to clients. "Most finance ministers have stressed that boosting the EFSF beyond the terms agreed on July 21 is an unlikely prospect."
The changes agreed to the EFSF in July still need parliamentary approval in several European countries before it can be implemented. Finland will vote on the issue later Wednesday.
"Comments from Finland yesterday suggest the proposals will get the green light and while unlikely to get the collateral deal they want, a compromise deal that enables Finland to contribute to the Greek rescue fund seems likely," Royal Bank of Canada said in another note to clients.
The troika of international inspectors is also due to return to Greece "from tomorrow" to continue negotiations on the implementation of Greece's austerity package and the conditional release of the next €8 billion aid tranche.
But worries about growth in the euro zone could become more pronounced if the release of German inflation figures undershoots expectations of 2.4% on a year-to-year basis. A lower reading could increase expectations that the European Central Bank will cut interest rates at its next meeting.
"Perhaps the market is more sensitive to downside surprises, potentially opening up ECB rate cuts," said Chris Turner, a currency analyst at ING in London.
Warning signs are building that the optimistic mood could turn negative. Germany's auction of €5 billion bonds was worryingly weak and attracted the lowest bid-to-cover ratio since the euro's inception.
The Hungarian forint and the Polish zloty came under some pressure after two days of strong gains, while the Chinese yuan fell to the lower end of its trading band despite the central bank's attempt to guide the currency higher in its daily fixing. The dollar-yuan central parity was set at 6.3623 Wednesday, down from Tuesday's 6.3760.
