* Euro, sterling extend gains vs yen
* Investor risk appetite improves as Tokyo shares rally
* Japan govt says to provide public funds to firms
By Masayuki Kitano
TOKYO, Jan 27 (Reuters) - The yen fell against the euro and
sterling on Tuesday as Tokyo shares rose and after the Japanese
government confirmed a capital injection scheme to help companies
seriously hurt by the financial crisis.
The yen had fallen the previous day after British bank
Barclays <BARC.L> said it would report a 2008 pretax profit and
U.S. data showed a rise in home sales, helping revive investors'
risk appetite.
The yen extended its losses on Tuesday after the Japanese
government launched a $16.7 billion scheme to buy shares in
companies whose future has been threatened by the financial
crisis []
That partially thawed investor risk aversion by boosting the
Nikkei share average <>, which jumped 4.9 percent. []
The yen often takes its cue from perceived swings in
investors' risk appetite and has tended to fall against
higher-yielding currencies when risk tolerance increases.
"The currency market had just seen a slight reduction in
financial sector concerns the previous day, and that coupled with
positive news for equities forced the yen to retreat," said
Takahide Nagasaki, chief FX strategist at Daiwa Securities SMBC.
But market players said the latest fall in the yen may have
been exacerbated by position unwinding, and played down the
impact of the government's rescue scheme, since details of the
plan had already been revealed at the weekend.
"It's hard to say whether market players will start taking
risks and sell the yen because of this," said Tohru
Sasaki, chief foreign exchange strategist for JPMorgan Chase Bank
in Tokyo.
"The yen had already been sold ahead of time and stocks had
risen, so it's hard to tell just how much of this move stemmed
from the news and how much of it was stop-loss position
unwinding," Sasaki said.
Market watchers said speculators took the jump in equities as
an opportunity to cover short positions ahead of the Federal
Reserve's two-day policy meeting starting Tuesday, giving the
euro and sterling a lift against the yen.
The euro was up 0.8 percent at 118.40 yen <EURJPY=R> on
trading platform EBS, having climbed to 118.91 yen earlier. The
euro hit a seven-year low of 112.08 yen last week.
Sterling climbed 1.2 percent to 125.85 yen<GBPJPY=R>, having
rebounded from last week's record low of 118.80 yen.
Amid the yen's broad weakness on Tuesday, the dollar rose 0.4
percent to 89.42 yen <JPY=>.
EURO, STERLING OUTLOOK MURKY
Sterling also rose against the dollar, climbing 0.6 percent
to $1.4085 <GBP=D4> and pulling away from a 23-year low of
$1.3500 hit late last week after data showed Britain's economy
shrinking at its fastest pace since 1980.
The yen could fall further against sterling and the euro in
the near term, especially if global stock markets rise and point
to further improvement in investors' risk appetite, traders said.
But the euro and sterling were unlikely to see a sustained
rally at this point, despite the previous day's rally, they said.
"What took place was probably a temporary unwinding of
positions that were tilted towards selling European currencies,"
said Yuji Matsuura, joint general manager for Aozora Bank's forex
& derivatives trading group.
Germany's Ifo monthly business climate index due later on
Tuesday could determine if the euro can retain its momentum,
traders said.
Against the dollar, the euro rose 0.3 percent to $1.3230
<EUR=>.
A Reuters poll of economists showed German corporate
sentiment likely deteriorated in January to the lowest levels
since German reunification in 1990, due to weakening demand and
production cuts. []
(Additional reporting by Shinichi Saoshiro; Editing by Michael
Watson)
