July 11, 2012 / 8:46 AM / 7 years ago

FOREX-Vulnerable euro steady near 2-yr low vs dollar

* Euro steady vs dollar, pressured vs yen
    * Expectations of quick German court ruling on ESM dim
    * Euro seen vulnerable to rising peripheral yields

    By Nia Williams
    LONDON, July 11 (Reuters) - The euro held near two-year lows
versus the dollar on Wednesday as it emerged there would be no
quick resolution to a German court hearing on activating euro
zone bailout funds, adding to unease over how policymakers will
tackle the debt crisis.
    Some market players had been hoping for a quick ruling from
Germany's Constitutional Court on whether the European Stability
Mechanism (ESM) and planned changes to the euro zone's budget
rules were compatible with German law. 
    But the decision looked likely to take several weeks, with
Finance Minister Wolfgang Schaueble saying he hoped a judgment
would be passed before the autumn. Without German backing, the
ESM, originally meant to start on July 1 and then delayed to
July 9, cannot be launched. 
    Although the euro held steady above Monday's two-year low
of$1.2225, analysts said a rise in Spanish and Italian
government debt yields could fuel concerns about political
hurdles and scepticism over the euro zone's decision-making
    The single currency was last up 0.1 percent at
$1.2260. A break below Monday's low would open the door to a
test of the June 2010 trough of $1.1875.
    "People will be aware the non-decision we have got (from the
court) might be a severe problem if yields really pick up and
then euro/dollar will come under pressure," said Lutz Karpowitz,
currency strategist at Commerzbank.
    Ten-year Spanish bonds were trading near the 7 percent level
that triggering an upward spiral in yields for bailout
recipients Ireland and Portgual, while Italian yields hovered
around 6 percent. 
    Italian Prime Minister Mario Monti said on Tuesday Italy
could be interested in tapping the euro zone's rescue fund to
ease its borrowing costs. 
    Some market players said there was room for the euro to edge
higher against the dollar in the near term but its outlook was
    "While the euro could see some short-term corrective moves
against the dollar, it is really difficult to think of taking
long positions in the coming months, considering Europe's
situation," said Masashi Murata, senior currency strategist at
Brown Brothers Harriman in Tokyo.
    Euro zone finance ministers meeting earlier this week 
failed to provide much reassurance. While the ministers agreed
to grant Spain an extra year to reach deficit reduction targets,
they did not come up with a final figure for aid for the
country's ailing lenders.  
    A rate cut by the European Central Bank last week also
removed a pillar of support for the euro, increasing chances it
could replace the yen or dollar as a "funding currency" for
buying higher-yielding assets. 
    The euro fell to five-week low against the yen on EBS at
97.10 yen, before paring losses to last trade flat at
97.30. Market players said support lay at 97.02 yen, the 76.4
percent Fibonacci retracement of the euro's June move from 95.59
to 101.63 yen, with bids also cited at that level. 

    The dollar dipped against the yen to 79.30 yen, with
support at its 200-day moving average at 78.99, as investors
awaited the outcome of the Bank of Japan's regular two-day
policy meeting beginning on Wednesday.
    The BoJ is expected to hold off on easing monetary policy
despite moves in that direction last week by the central banks
of Europe, Britain and China, convinced that Japan's economy is
still on track for a moderate recovery. 
    Market players were also looking ahead to the release of
minutes from the U.S. Federal Reserve's June meeting. Any
indication the Fed may opt for another round of asset buying
before the end of the year could weigh on the dollar against
perceived riskier currencies.
    Lacklustre updates from a number of U.S. companies cast a
shadow over the upcoming earnings season and compounded concerns
sluggish world growth was hitting profit growth. 
    The Australian dollar rose 0.4 percent against the U.S.
currency to US$1.0206 and also traded near an all-time
high against the single currency of A$1.1974.
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