The euro rose to a near four-month high against the dollar in choppy trading conditions Wednesday after Germany's constitutional court cleared the way for the euro zone's planned fiscal pact and permanent bailout fund, the European Stability Mechanism, removing a key obstacle to the 17-country bloc's anti-crisis strategy.
In a long-awaited ruling, the court turned down an injunction request that would have stopped the ESM finally being signed into German law, having originally been due to come into effect July 1.
Ahead of the decision, the currency shed some 0.5% against the dollar to trade at the day's low at $1.2815 before bouncing back to hit the day's high above $1.29. The euro also plunged against the Swiss franc and other major peers before rebounding from its lows. No major levels were broken, despite the sharp swings.
The euro's gains extended the currency's recent rally after the European Central Bank pledged last week to buy the debt of fiscally challenged member governments, subject to them formally requesting assistance from the ESM or its temporary forerunner, the European Financial Stability Facility, and adhering to a program of budgetary commitments.
In debt markets, meanwhile, yields on bonds issued by fiscally frail euro-zone countries were largely steady after the court verdict.
The yield on the benchmark two-year Spanish bond was 0.09 percentage point higher from Tuesday's close at 2.85%, while the corresponding Italian yield eased 0.02 percentage point to 2.46%.
The ECB has signaled that under the revamped bond purchase plan, it will buy government bonds with a maturity of up to three years.
The yield on the 10-year benchmark Spanish government bonds fell 0.02 percentage point to 5.63%, while the corresponding Italian bond yield was 0.04 percentage point lower at 5.04%.
The court verdict sapped demand for haven German debt, with the futures contract maturing in December falling more than half a point from Tuesday's close to trade at 139.64. The 10-year bund yield rose by seven basis points to 1.58%.
The court's ruling on the injunction Wednesday sends a clear signal about the likely outcome of the count's final decision on the legality of the ESM and fiscal pact which is due in December, said analysts.
By 0850 GMT, the euro was trading at $1.2895 against the dollar, having traded close to $1.25 in the runup to last week's ECB announcement.
Neelabh Chaturvedi contributed to this article.
Write to William Kemble-Diaz, Dow Jones Newswires; 44-20-7842-9347; william.kemble-diaz@dowjones.com; @djfxtrader
