* Euro rises to four-month high above $1.29
* Dollar index falls to new four-month low
* German court verdict underpins demand for riskier assets
* More gains expected in anticipation of further Fed easing
By Jessica Mortimer
LONDON, Sept 12 (Reuters) - The euro rose to a four-month high against the dollar on Wednesday after Germany’s Constitutional Court gave its approval to the euro zone’s new rescue fund and budget pact, allowing its ratification under certain conditions.
The euro rose 0.5 percent to $1.2937 on trading platform EBS, breaking above reported option barriers at $1.2900 to reach its highest level since mid-May.
More gains are expected if the Federal Reserve opts to implement further monetary easing on Thursday, leaving the euro with the potential to test the $1.30 level.
“Now with the uncertainty over the German court ruling out of the way it opens the door for the rally in euro/dollar to continue,” said Guillermo Felices, currency strategist at Barclays.
“Confirmation of more QE (quantitative easing) from the Fed would help it higher but I’d expect any knee-jerk rally to be limited.”
Germany’s Constitutional court said the European Stability Mechanism could go ahead but with a condition that any German contribution above 190 billion euros would require prior approval by the lower house of parliament.
Positive momentum continued for the euro as well as higher-yielding currencies following the European Central Bank’s unveiling of plans last week to lower the borrowing costs of indebted euro zone countries via bond purchases.
But analysts and traders were still wary that the depth of the euro zone’s debt problems could temper the euro’s rise.
“There are still big question marks over the euro zone. Spain has not even requested approval from the European authorities yet and it could be a tense process that could see more delays than the market expects.”
One London-based trader said the German ruling was “very positive for risk and very positive for the euro.”
Others were less confident.
“The German ruling is generally euro positive as 190 billion is a tad more than anticipated. But it is still a cap so I‘m cautious,” another trader said.
Traders reported another options barrier at $1.2950 and cited chart resistance at the May 11 high of $1.2958. The euro traded well above a low of $1.2815 hit on caution just ahead of the court decision.
The euro has risen more than 7 percent from July’s two-year low of $1.2042, buoyed after the European Central Bank’s pledge to do whatever it takes to preserve the currency.
The euro also rose to its highest in more than two months against the Japanese yen of 100.64 yen.
A potential source of disruption for the euro is a general election in the Netherlands on Wednesday, though polls indicate radical anti-euro parties have lost the momentum they had just a month ago.
The dollar fell to a four-month low against a basket of currencies before Thursday’s Federal Reserve decision, with the dollar index dropping to 79.522.
The Federal Reserve looks set to launch a third round of bond purchases this week to try to drive borrowing costs lower and boost a flagging economy, especially after weak jobs data last week.
However, analysts said expectations for more QE were already high which may limit the currency’s falls.
The dollar extended losses following a warning from Moody’s on Tuesday that the United States could lose its triple-A debt rating if next year’s government budget talks do not produce policies that gradually cut the country’s debt.
The dollar also fell to a four-month low against the Swiss franc of 0.93418 francs, while the higher-yielding Australian dollar hit a three-week high of US$1.0507.
The Swiss National Bank, is expected to keep its target range for the Swiss franc LIBOR unchanged and retain its cap on the euro/Swiss franc currency pair at 1.20 francs when it announces its monetary policy decision on Thursday.
The yen held near a 3-1/2-month high against the broadly weak dollar, trading at 77.79 per dollar.