By Chikako Mogi
TOKYO (Reuters) - Asian shares rose to three-week highs and the euro hit a four-month peak against the dollar on optimism that a German court will approve the legality of the euro zone's bailout fund later on Wednesday and the U.S. Federal Reserve may ease this week.
The positive mood was bolstered by reports saying Spain is considering asking help from the European Central Bank's bond buying plan but not a full sovereign bailout.
European equities were seen narrowly mixed, with a 0.3 percent rise in U.S. stock futures suggesting a firm Wall Street start. Financial spreadbetters called London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX to open between a 0.1 percent drop and a 0.2 percent rise.
Risk momentum was also supported by comments from Premier Wen Jiabao on Tuesday that China is on track to meet this year's target for economic growth and if needed, the government could utilise a 100 billion yuanfiscal stability fund to boost growth.
The Australian dollar, a typical gauge of risk appetite and highly sensitive to the economic health of Australia's largest export destination, China, climbed to a three-week high of $1.0490.
MSCI's broadest index of Asia-Pacific shares outside Japan added 1.2 percent, driven higher by a 1.6 percent jump to a three-week high in Seoul shares, with Europe-sensitive shipbuilders among the best performers. Australian shares rose 0.8 percent as banks advanced.
Germany's Constitutional Court said on Tuesday that it will go ahead with a ruling on Wednesday on the European Stability Mechanism (ESM) and budget rules, due at 0800 GMT.
Markets are anticipating an approval, which would help facilitate the ECB's bond-buying programme aimed at capping soaring borrowing costs in euro zone members that ask for a bailout.
A favourable court decision would show European sovereign debt and banking issues "are being addressed in a more robust form and obviously would be positive for banks there and banks here," said Peter Warnes, head of equities at Morningstar, adding that it will signal "the market is freeing up a bit."
Japan's Nikkei average rose 1.6 percent as the recovery in risk appetite dampened demand for the safe-haven yen, which eased 0.1 percent to 77.87. The yen rose to a 3-1/2 month high of 77.70 on Tuesday. The euro rose to $1.2883 on Wednesday, its highest since mid-May.
Rallies in riskier assets bolstered sentiment in Asian credit markets, narrowing the spread on the iTraxx Asia ex-Japan investment-grade index by 7 basis points to its tightest level since August last year.
"There is a general trend globally that money is flowing into higher-yielding credits" as yields on safe-haven government bonds such as German Bunds and Japanese government bonds remain suppressed, said Toru Yamamoto, chief strategist at Daiwa Securities.
"While markets are not strongly favouring risk, it is mildly putting on risk, leading to generally tight credit markets globally," he said.
The Fed begins its two-day policy meeting on Wednesday.
Markets widely expect some type of monetary stimulus to underpin the fragile U.S. economy ranging from a powerful bond buying known as quantitative easing (QE) to further extending the Fed's commitment to keeping interest rates near zero.
"I feel that the market is getting a bit too excited about the chance of QE. Still those who have bought the dollar and sold the euro are now getting nervous ahead of the Fed meeting and being forced to cut their positions," said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank.
The dollar index measured against a basket of key currencies hovered close to a four-month low of 79.794 touched on Tuesday. Expectations for more Fed easing and a warning from Moody's Investors Service that the United States, the world's biggest economy, may lose its top AAA rating if next year's budget talks do not produce policies to cut its debts weighed.
A weaker dollar continued to underpin most dollar-based commodities on Wednesday.
U.S. crude narrowed earlier losses to trade steady around $97.20 a barrel while Brent also recouped earlier losses and steadied around $115.38.
Spot gold inched up 0.2 percent to $1,735.72 an ounce, not far from Friday's peak of $1,741.30, its highest since February 29.
London copper edged higher to extend gains to a fourth session, trading around $8,093 a tonne.
(Additional reporting by Thuy Ong in Sydney and Hideyuki Sano in Tokyo; Editing by Kim Coghill)