Euro falls amid worries about ECB bond-buying

London

THE euro resumed its decline on Wednesday and the Japanese yen reached a seven-week high against the US dollar after a court decision challenged German participation in the eurozone's stimulus programme.

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's participation in one of its main stimulus schemes.

"Some clients are sensing that it is much easier to implement stimulus in the (United) States than it is in Europe," said Neil Jones, head of FX sales at Mizuho.

The euro fell to a near two-week low of US$1.0786 on Wednesday. The common currency was last down 0.4 per cent at US$1.0795.

The ECB is expected to be able to justify its bond purchases, so the German court decision is unlikely to derail the eurozone's stimulus efforts. But the uncertainty is only the latest strain on Europe's coronavirus response and undermines the eurozone project and the euro.

Athanasios Vamvakidis, head of G-10 currency strategy at Bank of America Merrill Lynch, said he expected the euro to weaken further amid a weaker global outlook, a more severe eurozone recession than others expect, a weaker eurozone macro-policy response and low oil prices.

Eurozone business activity almost ground to a halt last month as government-imposed lockdowns to stop the spread of the coronavirus forced factories, shops and restaurants to close and recreation to cease, a survey showed.

In addition, retail sales in the eurozone suffered their largest decline on record in March.

The fact that speculators are now long the euro also undermines its current levels, Mr Vamvakidis said. Leveraged funds have trimmed their long positions on the euro but the number of long positions is still close to their two-year highs.

"We expect euro/dollar to weaken in the months ahead," Mr Vamvakidis said, adding that the saw the euro falling to as low as between US$1.02 and US$1.05 "with risks to the downside". A declining euro helped Scandinavian currencies regain some strength. The Swedish crown rose to a two-month high versus the euro and the Norwegian crown reached a one-month high against the euro.

The yen rose 0.2 per cent to 106.20, its strongest since March 17. REUTERS