LONDON: The euro dipped against the dollar on Friday after Germany's Constitutional Court criticised the European Central Bank's bond-buying programme.
Traders said the court's objections to the scheme, which has underpinned the euro over the past two years, had jarred the single currency.
But by referring the issue to the European Court, the court also removed prospects that Germany might try to curb the programme, which helped limit the single currency's decline.
"The euro fell, but only slightly. That's obviously justified if you think the European Court of Justice is going to be more ECB-friendly," said Ulrich Leuchtmann, head of currency research at Commerzbank in Frankfurt.
The German judges said they saw substantial reasons to suggest the Outright Monetary Transactions (OMT) programme exceeded the ECB's mandate, but also considered it possible that it could conform with the law if interpreted restrictively.
The ECB's commitment to buy bonds has never been used but is generally credited with halting market attacks on Italy and Spain that had raised concerns over the whole future of the euro project.
The decision also comes at a time of debate within the ECB over its options for doing more to prop up the euro zone economy, including the sort of outright cash injections to which Germany has long objected.
The absence of an immediate move by the central bank on Thursday to add liquidity to the banking system had prompted a rise for the euro against the dollar.
After the court statement, the euro fell as low as at $1.3552 before recovering to $1.3572, still well off highs above $1.36 reached after the ECB's policy statement on Thursday.
QE MORE LIKELY?
"The ECB has to quickly assess what repercussions the ruling will have for the range of tools available to calm markets," said Christian Schulz, senior economist at Berenberg.
"Ironically, depending on the exact decision, the court may have made a much more wide-ranging quantitative easing programme at the ECB more likely."
Expectations that the ECB will take more dramatic action to spur growth, compared to the reining in of bond-buying by the US Federal Reserve, are at the heart of most banks' forecasts for a weaker euro this year.
A US jobs report on Friday is expected to show recovery in the world's biggest economy is firmly on track.
"The manufacturing ISM earlier this week shook confidence somewhat, adding to the weak payrolls number from a month ago," said Josh O'Byrne, currency strategist with Citibank in London.
"We think that if the number today comes in close to consensus it could be enough to reassure the market."
Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo, said the big picture of an end to the Fed's bond-buying later this year was still intact, no matter what the jobs reports shows. "I think in general, people are in agreement that it's not a tapering story as opposed to just a reevaluation of their positions," Wakabayashi said.
Even if labour conditions improve, Boston Federal Reserve President Eric Rosengren said late Thursday that the central bank should be "quite patient" in removing stimulus because broader measures of the US labour market remain weak.
Rosengren, considered a dovish Fed official, said the labour market conditions remain far from those which would warrant higher interest rates.
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