DJ: Euro Bounces As Cyprus Fears Fade; Pound Firms Before Budget

The euro bounced against the dollar during European trading Wednesday as calm returned to currency markets after the previous night's rejection by the Cypriot parliament of its bank bailout deal, while the pound strengthened in choppy trade ahead of the U.K. government's annual Budget statement.

The euro rose by more than half a cent to just over $1.29 against the dollar from the four-month low struck late-Tuesday as the after-effects of the Cypriot 'no' vote settled down and traders prepared for a policy update from the Federal Reserve.

Analysts said the market was satisfied that the contagion affects from Cyprus would be minimal and that a full-scale Cypriot default and subsequent exit from the euro zone would be avoided thanks to the backstop provided by the European Central Bank's untapped bond buying program.

"Contagion affects are still fairly limited, there are far more tools in place to manage the situation this time round than in previous times of market stress... so that's probably why the market reaction this time is more muted but the longer this goes on for the more risks are likely to creep higher," said Ian Stannard, European head of currency strategy at Morgan Stanley in London.

That lack of fear was evident in government bond markets, where Spanish and Italian bond yields eased even as demand for super-safe German debt drove 10-year German funding costs to their lowest level at auction since July 2012.

In the meantime, Cyprus's Finance Minister Michalis Sarris said talks with Russian counterpart Anton Siluanov on alternative means of financial support had been "very constructive".

Sterling rose sharply against the dollar to as high as $1.5157, buoyed by minutes from the Monetary Policy Council of the Bank of England which showed that the majority of members thought more asset purchases would cause unwarranted sterling depreciation.

That was seen taking the risk of additional quantitative easing off the table for the foreseeable future, as the clock ticked down to the U.K. Budget at around 1230 GMT, with data showing a rise in U.K. unemployment for the first time in a year and a drop in average earnings growth to its lowest in more than three years.

For currency traders much of the focus is likely to be on whether Chancellor of the Exchequer George Osborne tweaks the BOE's inflation targeting remit to give it more leeway to help revive the U.K.'s struggling economy.

"We don't believe that the Chancellor will make the sort of wholesale changes to the Bank of England's modus operandi that causes sterling to plummet," Steven Barrow, head of currency strategy at Standard Bank, wrote in note to clients.

The South African rand was weaker against the dollar after the South African Reserve Bank kept its key policy rate on hold at 5%. Prior to the rate decision, the rand hit the day's high after Gil Marcus, the central bank's governor, said the rand's depreciation in the last few months had been overdone.

Looking ahead, the Federal Reserve Open Committee is expected to meet from 1800 GMT. Analysts at Danske Bank don't expect any changes to the pace of asset purchases as the Fed is in no hurry to exit the program until the rate of unemployment steadies at its target of 6.9%.

At 1135 GMT, the euro was trading at $1.2910 against the dollar, compared with $1.2883 late Tuesday in New York, according to trading system EBS. The dollar was at Y95.40 against the yen, compared with Y95.16, while the euro was at Y123.18, compared with Y122.60. Meanwhile, the pound was trading at $1.5117 against the dollar, compared with $1.5107 late Tuesday in New York.

The Wall Street Journal dollar index, which tracks the U.S. dollar against a basket of currencies, was at 73.642 from about 73.695.