FOREX-Euro steadies near 4-month peak after German ruling
* Euro near 10-week high vs yen, British pound
* Euro looks to extend gains if Fed opts for more stimulus
* German court ruling reduces fears about Europe
* Dollar slips to three-month low vs yen
By Hideyuki Sano
TOKYO, Sept 13 (Reuters) - The euro held near a four-month high on Thursday after Germany's Constitutional Court gave the green light for Berlin to ratify the euro zone's permanent rescue fund, looking to extend gains further on possible stimulus from the U.S. Federal Reserve.
The euro changed hands at $1.2926, up 0.2 percent from late U.S. levels and near a four-month high of $1.2937 hit a few hours after the court's ruling on Wednesday.
The court said the German parliament should be given veto rights over any increase in Germany's current contribution of 190 billion euro, but the conditions it spelled out were less onerous than some had feared.
With expectations of the European Central Bank's bond buying plan helping to reduce borrowing costs of Spain and Italy, market players' perceived risk of a major crisis in the currency bloc is receding, prompting a buy-back in the euro.
The common currency held near a 10-week high against the yen, trading at 100.45 yen, just below Wednesday's high of 100.64 yen. Against the British pound, it stood at 0.8018 pound, after having hit a 10-week high of 0.8028 on Wednesday.
Also slightly helping the euro were results of the Dutch election, where pro-European parties crushed radical fringes, dispelling concerns that eurosceptics could gain sway in a core euro zone country.
The euro is likely to extend gains further if the U.S. Federal Reserve unveils a new asset purchase programme, dubbed as QE3, as that would be its third round of quantitative easing, when it announces its policy at 1630 GMT.
"If the Fed avoids major easing steps, the euro could fall. Still, considering that the euro's rally has been driven by short-covering rather than build-up of new positions, downside for the euro may be limited," said Koichi Takamatsu, head of forex at Nomura Securities.
Mounting expectations that the Fed might print more dollars, thereby cheapening their value, had pushed down the dollar index to a four-month low of 79.522 on Wednesday. It last stood at 79.575.
Against the yen, the dollar hit a three-month low of 77.671 yen on trading platform EBS. A drop below its early June trough of 77.652 yen would take the dollar to its lowest level in seven months. The dollar last stood at 77.72 yen, down 0.2 percent from late U.S. trade on Wednesday.
Should the dollar fall further, wariness about Japan's currency intervention could intensify, traders said.
Many Fed watchers believe any new asset purchase programme would be open-ended, unlike the past two cycles of quantitative easing. That would allow the central bank to review the size of its purchases on a frequent basis, perhaps meeting-to-meeting, and adjust the programme as economic circumstances warrant.
"The market has not 100 percent priced in QE3 yet," said Masafumi Yamamoto, chief FX strategist at Barclays, noting that whether its monthly purchase size would be larger than that under the previous QE of $75 billion would be important, regardless of whether the programme is open-ended or not.
In the Reuters poll, among economists that saw a new stimulus programme being open-ended, the median forecasts for how big the initial installments would be came to $70 billion per month.
Later on Thursday, the Swiss National Bank is expected to keep its target range for the Swiss franc LIBOR unchanged and retain its cap on the Swiss franc at 1.20 francs to the euro when it announces its monetary policy decision.
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