LONDON — Investors breathed another sigh of relief Wednesday, sending the euro above $1.29 for the first time in four months after Germany's highest court rejected calls to block the Europe's permanent rescue fund, removing another uncertainty from Europe's efforts to solve its debt crisis.
Even though the decision by the Federal Constitutional Court comes with certain conditions, it means the European Stability Mechanism can be signed off by the country's president and come into force by early next year.
The euro was the big beneficiary from the decision, climbing 0.5 percent on the day to a high of $1.2920, the first time it's been above the $1.29 threshold since May 14.
Stocks also got a boost, with Germany's DAX up 0.9 percent at 7,375 and the CAC-40 in France 0.7 percent higher at 3,562. The FTSE 100 index of leading British shares was 0.2 percent firmer at, 5805.
The fund is important because it can loan money to cash-strapped governments. It's also due to play a key role in the recent bond-buying plan unveiled by European Central Bank president Mario Draghi, the main reason behind the turnaround in market sentiment over Europe over the past few weeks.
"With the Germans now seemingly fully committed to the ESM, and the Draghi plan in force, hopes are high for an easing of the eurozone crisis," said Chris Beauchamp, market analyst at IG Index.
The borrowing rates of countries at the frontline of Europe's debt crisis eased further Wednesday, with the yield on Spain's 10-year bonds down 0.07 percentage point to 5.60 percent and Italy's falling 0.03 percentage points to 4.98 percent. Not long ago, both countries were seeing this key interest rate above 7 percent, widely-considered as unsustainable in the long-run.
Despite the positive reaction in the markets, investors think Europe is a long way from being fixed. Greece still has to convince creditors that it deserves more bailout money, while Spain appears undecided about whether to tap the ECB's bond-buying facility.
Also, there are real doubts that the ESM is fit for purpose. The €500 billion available would not be enough in the event that Italy or Spain needed to be bailed out like Greece, Ireland and Portugal.
"In the event of a Spanish and Italian bailout, even with ESM ratification, the resources available fall short of what is required for such bailouts," said Neil MacKinnon, global macro strategist at VTB Capital.
The next big event on the horizon for markets will be Thursday's decision by the U.S. Federal Reserve on whether to back another monetary stimulus. Expectations that it will do so have risen lately following a run of soft economic data.
Many analysts remain skeptical that the Fed will do anything more than reassert that it's willing to do more, especially as a number of its policymakers may be reluctant to do something dramatic in the middle of the U.S. presidential campaign.
Wall Street was set for gains, with Dow futures and the broader S&P 500 futures up 0.5 percent.
Earlier in Asia, Japan's Nikkei 225 index rose 1.7 percent to close at 8,959.96. Hong Kong's Hang Seng added 1.1 percent to 20,075.39 and South Korea's Kospi gained 1.6 percent to 1,950.03. In mainland China, the Shanghai Composite Index gained 0.3 percent to 2,126.55. The Shenzhen Composite Index gained 0.5 percent to 901.29.
Oil prices edged higher too, with benchmark crude for October delivery up 63 cents to $97.80 per barrel in electronic trading on the New York Mercantile Exchange.