Euro gains, but vulnerable before German ruling

LONDON: The euro rose against the dollar on Wednesday along with high-yielding currencies and tracked equity gains, but it was vulnerable ahead of a German court ruling that may complicate a solution to the euro zone debt crisis more complex.

Traders said the euro was also lifted after it failed on Tuesday to make a sustained break below the $1.40 level, but said once below there it could quickly drop towards its July 12 low at $1.3837. It was last up 0.6 percent at $1.4083.

In a ruling due at 0800 GMT, the German Constitutional Court is expected to stop short of blocking Germany's contributions to multi-billion euro bailout packages, but it may limit Berlin's ability to react swiftly to a worsening of the debt crisis.

This would highlight to investors the political difficulties in reaching any solution on the debt crisis on the euro zone periphery, while concerns remain that weak growth may prevent indebted countries fulfilling ambitious deficit cutting plans.

"There has been a small increase in euro/dollar as there was some disappointment it didn't break decisively lower in a choppy session yesterday," said Niels Christensen, currency strategist at Nordea in Copenhagen.

He added, however, the euro was "vulnerable in the current environment".

"There is some tension ahead of the German constitutional court ruling. No one is expecting anything dramatic but it may require commitment from parliament, which would be negative for the whole solution to the euro zone crisis".

A rise in equities, helped after better-than-expected ISM non-manufacturing PMI figures and data showing Australia's economy growing at its fastest pace in four years last quarter, nudged the euro up, but it stayed off a high of $1.4286 hit after the Swiss announcement.

Traders said it may soon sink back under its 200-day moving average around $1.4019.

However, the euro held on to its hefty gains made against the Swiss franc on Tuesday after the Swiss National Bank shocked the market by saying it would enforce a limit of 1.20 francs to the euro by buying foreign currencies in unlimited quantities. It was last steady at 1.2052 francs.

Analysts also said the euro would be vulnerable ahead of an interest rate announcement from the European Central Bank on Thursday.

"The euro has to some extent been supported by slightly higher interest rates (in the euro zone), so any comments by (ECB President Jean-Claude) Trichet hinting at some form of easing would send the euro down towards $1.37," said Minori Uchida, senior analyst at Bank of Tokyo-Mitsubishi UFJ in Tokyo.

Commodity currencies rose after Asian bourses rebounded, with the Australian dollar up 0.8 percent at $1.0585 , buoyed by the Australian data. Its next resistance level was at $1.0625, the 55-day moving average, with support at $1.0482.

The dollar index was off a two-month high, trading at 75.615, down 0.4 percent on the day.

Against the yen, the dollar was down 0.3 percent at 77.35 yen , with the Japanese currency supported following the Bank of Japan's decision to keep policy on hold. Traders said some players had expected Japan may also ease after Tuesday's move by the Swiss National Bank to curb strength in its currency.

Copyright Reuters, 2011