On Tuesday the Euro rose sharply against the Japanese Yen signaling investor confidence that the coordinated European bailout plan will revive floundering banking systems. The gain followed announcements by Britain, Germany and France to recapitalize their banking systems taking the apprehension out of extreme risk aversion and hastening the selling of the Japanese Yen.



Last week the Japanese Yen saw stunning gains as investor uncertainty over how much deeper the global financial crisis was going to get prompting many investors to unload risky carry trade positions as global share prices fell sharply. The US also announced plans to recapitalize banks. Insiders familiar with the US plan said that about half of the proposed $250 billion would go to the nation's largest banks. Japan's Finance Ministry announced plans on Tuesday to stabilize financial markets, including the passage of a law enabling public fund injections into regional banks.

According to analyst Lena Komileva, "The market is pricing out the worst case scenario of a depression and with receded structural risk we're clearly in a less risk-negative environment than we were a week ago. It does support a recovery in the euro against the dollar today." By late morning the Euro was up nearly 2 percent versus the yen and moving well away from three-year lows hit last week. The US dollar was reported 0.8 percent lower against of six major currencies. The British Pound rose 1.2 percent against the dollar.

Because of Japan's low interest rates many investors use the Yen to fund carry trades in which investors sell low-yielding currencies to invest in higher-yielding currencies. With investor confidence returning, some investors are returning to riskier trades which helped to put pressure on the Yen. Some analysts are saying that investors should continue to b cautious in the face of a worsening outlook for the global economy.

Interbank lending is also of concern to investors and although there are signs that credit markets are loosening up current conditions are far from normal. European banks lowered rates across the continent in an attempt to get credit, the lifeblood of the economy, flowing again. "The most important thing is to get money markets working again," said Neil Parker, market strategist at Royal Bank of Scotland. If we can do that, with a combination of the measures that have already been put in place and further interest rate cuts from the central banks, then we could be reaching a turning point."

It is obvious that Forex markets continue to offer traders and investors opportunities currently unavailable in volatile stock markets.