May 6, 2020 / 4:58 AM / a month ago

FOREX-Euro slumps, yen gains as markets fret over global recovery

* Court queries German participation in ECB bond purchases

* Euro falls to 3yr low vs yen; yen hits 7 week peak vs dollar

* Yuan at month low in onshore trade

* Graphic: World FX rates in 2020 tmsnrt.rs/2RBWI5E

By Tom Westbrook

SINGAPORE, May 6 (Reuters) - The yen scaled a three-year high against the euro and a seven-week peak on the dollar on Wednesday, after a court decision challenging German participation in Europe’s stimulus programme and worries about a bumpy global recovery spooked investors.

Germany’s highest court on Tuesday gave the European Central Bank three months to justify purchases under its bond-buying programme, or lose the Bundesbank as a participant in a scheme aimed at cushioning the economic blow from the coronavirus.

The news sent the euro to a one-week low of $1.0826, where it has stayed, and a three-year trough of 115.09 yen that it hit in the Asian session, as traders worried about both the scheme and euro zone turmoil.

The yen also edged up against the dollar, pushing through resistance to a seven-week high of 106.22, though volumes were light with Japanese markets shut for the final day of a national holiday.

Other majors were mostly in stasis, as dire economic indicators and concerns about U.S.-China tensions held recovery optimism in check.

“The yen has been the pick of the major currencies since the crisis started, and that should continue,” Kit Juckes, head of FX strategy at Societe Generale, said in a note.

“The level of yields is biggest driver of yen strength and they’d have to go up a fair bit globally to make the yen weaken.” Long-dated U.S. yields rose overnight, as the U.S. plans a borrowing spree, but remain near historic lows.

The yen is up about 2% on the dollar and nearly 6% on the euro for the year so far. It hit a three-week high against the Korean won on Wednesday and is not far from a month high against the Australian dollar.

The Aussie and kiwi were each steady on the greenback, above 64 cents and 60 cents, respectively.

The Aussie last sat at $0.6432 and the New Zealand dollar at $0.6052. The pound was steady at $1.2431.

The German court decision is unlikely to completely derail Europe’s stimulus programme since the European Central Bank is broadly expected to be able to justify its bond purchases.

But the resulting uncertainty is only the latest strain on Europe’s teetering coronavirus response.

The pandemic’s heavier toll on debt-laden Italy and Spain, compared with Germany, has revived tensions between wealthy northern and poorer southern European member states - leaving politicians divided and the ECB to do the heavy lifting.

“This will be the second time we have been in a major crisis where the ECB has been put under heavy pressure,” St. Louis Federal Reserve president James Bullard said on Tuesday.

“This very much is a stress test for the euro and the European project to be able to react to this crisis in an effective way,” Bullard said in webcast remarks. “I am just hopeful this will be a catalyst.”

Elsewhere, U.S. President Donald Trump again pressed China about the origins of the outbreak that has killed more than a quarter of a million people since it started in the Chinese city of Wuhan late last year.

Markets are awaiting a response from Beijing to his latest comments, which last week included a threat of fresh tariffs on Chinese goods.

China’s yuan, a barometer of Sino-U.S. tension, has recovered some ground lost on Friday and Monday in offshore trade though resumed onshore trade, after the May Day break, at a month-low 7.0885 per dollar. (Reporting by Tom Westbrook; Editing by Shri Navaratnam and Sam Holmes)

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