The euro rose to the highest in almost four months versus the dollar after Germany’s top constitutional court said it will proceed with a ruling on the country’s role in the European Stability Mechanism bailout fund.
The dollar fell to the lowest in almost three months against the yen before the Federal Reserve starts a two-day meeting tomorrow amid speculation it will buy bonds to boost the economy in a third round of so-called quantitative easing. New Zealand’s dollar strengthened against all of its 16 major peers as Fitch Ratings affirmed the nation’s AA rating.
“The market is anticipating the German Constitutional Court will approve the ESM,” said Yoshitsugu Fujita, assistant vice-president of global markets in New York at Sumitomo Mitsui Trust Bank Ltd. “If it actually passes” the euro may rally, he said.
The 17-nation currency gained 0.4 percent to $1.2810 at 9:02 a.m. New York time. It earlier touched $1.2819, the highest since May 22. The euro dropped 0.2 percent to 99.73 yen. The dollar slipped 0.6 percent to 77.84 yen, touching the weakest since June 1.
The euro may strengthen to a four-month high against the dollar, UBS AG said, citing trading patterns.
The shared currency may rise to $1.2935, the 61.8 percent retracement from its decline from the Feb. 24 high to the July 24 low on the Fibonacci chart, Richard Adcock, head of fixed-income technical strategy in London, wrote in an e-mailed note to clients today. That would be the highest since May 11, according to data compiled by Bloomberg.
Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low.
The implied volatility of three-month options for Group of Seven currencies touched 7.81 percent, the lowest since October 2007, according to the JPMorgan G7 Volatility Index. A decrease makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.
New Zealand’s so-called kiwi advanced as Fitch affirmed the country’s AA rating, citing its strong governance and business environment.
The kiwi rose 0.9 percent to 81.59 U.S. cents and added 0.3 percent to 63.52 yen.
The British pound rose to the strongest level in almost four months versus the dollar after a report showed the U.K. trade deficit shrank in July as exports soared, adding to signs the economy is emerging from recession.
Sterling gained 0.3 percent to $1.6038 after trading at $1.6041, the strongest since May 15.
The Federal Constitutional Court is due to decide tomorrow on Germany’s participation in the European Stability Mechanism, a 500 billion-euro ($639 billion) fund that offers loans to member states and may buy their bonds to lower borrowing costs.
A plaintiff in the case had asked for a delay after the European Central Bank last week pledged unlimited funds to buy euro-area government bonds as it seeks to tame the region’s sovereign-debt crisis. The bid won’t change the ruling date, the court said in an e-mailed statement today.
“Everybody is very anxious to see what decision we will get from the court,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “The most likely path is the German court ruling in favor of the ESM. Investors are also pricing in the probability of QE going forward.”
The U.S. currency declined against all but two of its 16 major peers before Fed policy makers gather. They will keep their key interest rate at 0.25 percent, according to all 54 economists surveyed by Bloomberg before the announcement on Sept. 13.
The dollar will remain weak if the Fed expands its balance sheet, Chris Weston, an institutional dealer at IG Markets in Melbourne, said in an interview on Bloomberg Television. “I would be looking to sell any kind of big rallies in the dollar,” he said.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, declined 0.3 percent to 80.184 after touching 80.122, the lowest since May 10.
The dollar has lost 1.3 percent in the past week, the worst performance among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro strengthened 0.6 percent, the second-biggest advancer after the New Zealand dollar.