FOREX-Euro near 2-yr lows, awaits German verdict on bailout fund

Wed Jul 11, 2012 7:31am BST

* German court hearing on euro zone bailout fund weighs on euro

* Euro skids to 5-week trough against yen

* Dollar slightly down vs yen as BOJ begins 2-day meeting

By Lisa Twaronite

TOKYO, July 11 (Reuters) - The euro steadied in Asian trade on Wednesday but hovered near two-year lows against the dollar as investors fretted about the outcome of a German court hearing on the euro zone bailout fund, the latest obstacle to efforts to beat the region's debt crisis.

The political hurdles and investor scepticism about European Union's decision-making process are likely to ensure the single currency will remain under pressure for some time, market players said.

"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.

The euro was changing hands at $1.2266, with Monday's EBS two-year low of $1.2225 in sight, a break of which would open the way to a test of support at $1.20.

If that level is breached, the pair could move to test its June 2010 low of $1.1875.

The German Constitutional Court began a hearing into whether the euro zone's bailout fund, the European Stability Mechanism (ESM), and planned changes to the region's budget rules are compatible with German law. Without German backing, the ESM, which was originally meant to start on July 1, then delayed to July 9, cannot come into effect.

German Finance Minister Wolfgang Schaeuble said any significant delay in approving the ESM could lead to more market turmoil and undermine confidence in the euro zone.

The latest meeting of euro zone finance ministers this week also failed to provide much reassurance.

While the ministers agreed to grant Spain an extra year through 2014 to reach its deficit reduction targets, they did not come up with a final figure for aid for the country's ailing lenders but said some 30 billion euros would be available by the end of this month.

The euro fell to five-week low against the yen on EBS at 97.09 yen, and last traded at 97.33 yen.

Market players said support lay at 97.02 yen, the 76.4 percent Fibonacci retracement of its June move from 95.59 yen to 101.63 yen, with bids also cited at that level.

The British pound was trading close to a 3-1/2-year high against the euro of 78.89 pence touched on Tuesday, with the common currency last at 78.98 pence.

The dollar last traded down slightly against the yen at 79.39 yen, with support at its 200-day moving average at 78.99 yen, as investors awaited the outcome of the Bank of Japan's regular two-day policy meeting beginning this session.

The Bank of Japan is expected to hold off on easing monetary policy despite easing moves last week by the central banks of Europe, Britain and China, convinced that the country's economy is still on track for a moderate recovery.

The Australian dollar also traded near an all-time high against the single currency of A$1.1974 hit on Tuesday, and was last trading at A$1.2008. Against the U.S. dollar, the Aussie rose 0.3 percent to $1.0208.

The weaker euro helped support the dollar against a basket of six major rivals, with the dollar index holding ground at 83.272, down 0.1 percent but still not far off a June 1 peak of 83.542. A break of that level would take it back to mid-2010 highs. (Additional reporting by Masayuki Kitano and Reuters FX analyst Rick Lloyd in Singapore; Editing by Simon Cameron-Moore)

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