NEW YORK: The euro rallied on Wednesday as sovereign debt worries abated temporarily after a German court backed the country's role in euro zone bailouts, though gains may be limited ahead of a European Central Bank meeting.
Analysts expect the ECB on Thursday to flag a pause in its tightening cycle due to slowing global growth, easing inflation, and rising euro zone debt concerns. Some even suggested that the ECB could sound outright dovish.
"In the longer term, you've got to believe that the euro is very much under pressure. The euro tried to rally on the German court decision, but its attempt has so far been weak," said Dean Popplewell, chief FX vstrategist, at OANDA in Toronto.
"Tomorrow investors expect the ECB to tweak its statement to appease the doves," he added, and that has injected some element of caution in buying euros.
In early afternoon trading, the euro was up 0.6 percent on the day at $1.4059 on electronic trading platform EBS, off a session high of $1.41504 hit immediately after the German Constitutional Court's ruling. The euro though was still down 2.0 percent this month.
Although the court's decision was seen as positive for the single euro zone currency, the court also said parliament must have a bigger say before aid is granted, which could potentially make a solution to the euro zone debt crisis more cumbersome.
"It could hamper (German) participation going forward," said Omer Esiner, chief market analyst, at Commonwealth Foreign Exchange. "It's a double-edge sword."
Data showing German industrial output rose more than expected in July and a rise in equities supported the euro. But analysts said it could struggle ahead of the ECB decision and sink back under its 200-day moving average around $1.40196 at current prices.
Traders said the euro is well-supported above $1.40 after failing to break below that level on Tuesday. Investors, however, were still inclined to sell on rallies, which could leave the currency vulnerable to a drop toward the July 12 low at $1.38376.
The euro held gains against the Swiss franc, which fell for a second straight day after the Swiss National Bank on Tuesday said it would set a floor of 1.20 francs to the euro by buying foreign currencies in unlimited quantities. The euro was last up 0.3 percent at 1.20990 francs on EBS.
The dollar, meanwhile, was down 0.4 percent at 0.85831 franc on EBS.
SWEDISH CROWN, AUSSIE RISE
As investors fled the safety of the franc following Tuesday's SNB move, it was the Swedish crown's turn to shine.
The Swedish crown rose to a three-month high against the euro after Sweden's central bank said further monetary tightening would be postponed but did not signal any intent to cut rates, as some investors had expected it would.
Investors snapped up the Norwegian crown on Tuesday -- a currency with robust economic fundamentals -- as they frantically searched for an alternative safe haven to the franc.
"There is a tremendous amount of desperation around. Everybody is asking where the new safe haven is," said Sebastien Galy, currency strategist at Societe Generale in London.
"The Swedish crown is very attractive for a euro-based investor because the ECB is starting to look like it may cut rates. Only a few days ago the crown was trading below its short-term fair value based on rate differentials. Now people are rushing into it."
Commodity currencies also rose, with the Australian dollar up 1.3 percent at US$1.0636, buoyed by a report showing the Australian economy grew at its fastest pace in four years last quarter.
The dollar, meanwhile, was down 0.4 percent against the yen at 77.300 yen on EBS.
Traders said the yen was supported by the Bank of Japan's decision to keep policy unchanged. Some market players had expected Japan to take measures to stem the yen's strength after Tuesday's move by the SNB.
Copyright Reuters, 2011
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