October 20, 2014 / 12:31 PM / 3 years ago

FOREX-Yen recovers ground as European stocks fall

* Risk appetite wanes in European trading

* Yen steadies vs dollar after earlier losses

* Euro up despite weak German data

By Jemima Kelly

LONDON, Oct 20 (Reuters) - The yen recovered some ground against the dollar on Monday as worries about global growth persisted, making investors wary of riskier assets.

Germany's central bank said on Monday that the German economy - the largest in the euro zone - risks coming dangerously close to recession, forecasting little or no economic growth in the second half of the year.

The European Central Bank, meanwhile, said it had started buying covered bonds, opening a new front in its battle to revive the euro zone economy and keep deflation at bay.

As investors turned cautious, the yen, seen as a safe place to park money in times of economic or political turmoil, recovered and was trading flat against the dollar at 106.84 yen, after weakening in Asian trade.

The Bundesbank's gloomy assessment raises the prospect that the German economy could stay weak, compounding the problems of the 18-country currency bloc, where the economy is already slowing to a virtual halt.

German data showed producer prices declining for the 14th consecutive month, highlighting the disinflationary pressures concerning investors and policymakers alike.

The euro held up, and was 0.1 percent firmer at $1.2773 , but European stocks fell, trimming lofty gains made in the previous session, and Wall Street futures also indicated a lower start.

"The European trading session has opened in the red. Some of the positive momentum that had been building in the Asian session has given way," said Lee Hardman, a currency economist at Bank of Tokyo-Mitsubishi-UFJ in London.

"That shows the market is still trying to digest ... those big moves that we saw last week. It's going to take some time for the markets to settle down again."

The yen had weakened in Asian trade, with the dollar hitting a day's high of 107.39 yen, as risk appetite had improved and on reports that Japan's $1.2 trillion Government Pension Investment Fund (GPIF) will boost its foreign stock holdings, which spurred demand for foreign currencies.

In European trade the dollar index, which measures the greenback against a basket of six major currencies, was flat at 85.140 after dropping to a three-week trough of 84.472 last week.

The dollar had hit a six-year high at the start of this month above 110 yen - a level at which nearly half of Japanese firms think the government should start defending the currency, according to a Reuters poll - but has fallen back as growth worries prompted flows into safe-haven assets.

Ian Stannard, head of European currency strategy at Morgan Stanley in London, said the dollar was unlikely to resume its recent rally this week, but that over the medium term, it would continue on an upwards trajectory.

Data later this week could have a bearing on global risk sentiment, including U.S. inflation on Wednesday and euro zone and German PMI indexes on Thursday. (Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Andrew Heavens and Susan Fenton)

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