MW: Euro at highest since Mid-May on German ruling
By Deborah Levine and William L. Watts, MarketWatch
SAN FRANCISCO (MarketWatch) — The euro rose on Wednesday to its strongest level versus the dollar in nearly five months after Germany’s Federal Constitutional Court cleared the way for Berlin to ratify the euro zone’s permanent rescue fund, the European Stability Mechanism.
The ruling clears the way for Europe’s largest economy to fund its share of any future bailouts needed by other countries, which is a prerequisite for any bond purchases from the central bank, hopes of which have fueled the euro’s recent rally.
The euro EURUSD +0.26% rose to $1.2903, from $1.2857 in late North American trading Tuesday. Earlier, the shared currency traded as high as $1.2936, according to FactSet, its highest level since mid-May.
The euro rose 0.5% against the Japanese yen EURJPY +0.38% to ¥100.51.
The ICE dollar index DXY -0.21% , which measures the greenback against a basket of six major currencies, slipped to 79.690 from 79.866 Tuesday.
In a long-awaited ruling, Germany’s top court rejected calls to block ratification of the 500 billion euro ESM. The court imposed some conditions, ruling that any move to increase German liabilities beyond €190 billion would require additional approval by parliament. Read about German court ruling on ESM .
Markets expected the court to impose some such conditions, which some feared could be onerous.
Even though Germany’s current contribution limit would hardly enough to bailout Spain, let alone Italy, the ruling “left the door open to a larger contribution by saying that the lower parliament would have to vote on any increase in its size,” said Kathleen Brooks, research director at Forex.com. “So, as long as there is the will within Germany’s political classes to save the euro zone, then there is the cash.”
The ruling was largely in line with expectations but managed to provide a modicum of relief, strategists said. That’s because a move to block the ESM would have called into question the viability of the European Central Bank’s bond-buying plan and the overall ability of European leaders to address the crisis.
“Political risks may linger, but market-systemic risks have significantly abated, given the European Central Bank’s readiness to act. We continue to remain bullish on euro,” said currency strategists at BNP Paribas.
Others say the euro’s gains may be over as few positive catalysts for the eruro are coming up. Read blog on end of the euro’s rally.
Federal Reserve up next
Additionally, the Federal Reserve is slated to start its two-day policy meeting later Wednesday amid growing speculation that it will introduce more measures to stimulate the U.S. economy.
Many investors -- but by no means a consensus -- expect the Fed to launch another large-scale program of bond purchases. That kind of policy, sometimes called quantitative easing, is considered akin to printing money, and therefor devalues a currency.
However, many suspect the Fed may feel that’s premature and opt to extend its promise to keep interest rates at all-time lows past the end of 2014 — what it put in the last meeting statement. Or it could do both. Read more in Fed preview.
“It seems that investors are becoming more convinced about the idea that the Fed may initiate another round of quantitative easing on Thursday,” said currency strategists at BNP Paribas.
The U.S. central bank began its two-day meeting earlier in the session.
Alomg other currencies, the British pound GBPUSD +0.24% rose to $1.6109 from $1.6067 late Tuesday.
Against the Japanese yen USDJPY +0.11% , the dollar traded at ¥77.88, rising from ¥77.70 Tuesday.
The Australian dollar AUDUSD +0.17% advanced to $1.0462 from $1.0435.
Deborah Levine is a MarketWatch reporter, based in San Francisco.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt. Sarah Turner in Sydney contributed to this report.
