A resilient performance by Japanese shares helped stocks in Europe and the U.S. Thursday, while the yen pulled back from a record high against the dollar amid expectations that finance chiefs from the world's industrialized nations will discuss how to ease the currency's rise.
Once again, the focus of attention in the markets centered on Japan, which is trying to deal with the effects of last week's catastrophic earthquake and tsunami, notably a potential meltdown at the Fukushima nuclear plant.
The near-term fortunes of stock markets around the world will likely hinge on how successful the Japanese authorities are in bringing the crisis at Fukushima under control. If a nuclear catastrophe is avoided, investors will be freed of a large measure of uncertainty to focus solely on the economic cost of last week's natural disasters.
"Make no mistake the situation in Japan is serious and the trauma that is being felt by its people something that none of us can or should ignore, but for financial markets it is probably time to move on and to start believing that Japan will succeed in rebuilding," said Howard Wheeldon, senior strategist at BGC Partners.
So far, there is some relief that the worst scenarios envisioned by some have not materialized. Although Japan's benchmark Nikkei 225 fell 1.4 percent to close at 8,962.67, that was a recovery from a 3.6 percent drop earlier and is much smaller than the declines posted on Monday and Tuesday, before a rally Wednesday.
The Nikkei's rally from its daily lows helped European and U.S. markets recover their poise Thursday.
Optimism was further buoyed by a bigger than expected drop in weekly jobless claims to 385,000. Figures showing U.S. consumer prices rising 0.5 percent in February, slightly more than anticipated, had little impact as few traders expect any change in U.S. monetary policy in the coming few months, especially with so much volatility in the markets.
In Europe, the FTSE 100 index of leading British shares was up 1.8 percent at 5,697 while Germany's DAX rose 2.2 percent to 6,656. The CAC-40 in Paris was 2.4 percent higher at 3,789.
On Wall Street, the Dow Jones industrial average was up 1.2 percent at 11,753 around midday New York time while the broader Standard & Poor's 500 futures rose 1.4 percent to 1,274.
In the currency markets, the yen's outlook was the main topic of discussion.
In frantic trading earlier, the dollar plunged to an all-time low of 76.53 yen before rallying back up to 78.90 yen in mid-morning London trading. Even that level is way down on the previous all-time low of 79.75 yen recorded back in April 1995.
Counter-intuitively, the yen has been a huge beneficiary of the carnage wrought by the earthquake and tsunami as it gains from its widely perceived status as a safe haven in times of market turmoil and as speculators buy up it up on expectations of further rises. The yen has also been buoyed by evidence that Japanese investors are repatriating cash to pay for reconstruction _ in the case of insurance companies, to pay claims for the massive loss of property and life.
The yen fell back, however, after confirmation that the Group of Seven finance ministers and central bankers will be holding an emergency conference call, probably later Thursday, to discuss ways to calm fidgety markets.
"Although agreement on foreign exchange issues has lately been problematic for the G-7, we currently see a stronger case for international approval of intervention by Japanese authorities or even multilateral action, which would be the first such move since 2000," said Nick Bennenbroek, a currency strategist at Wells Fargo Bank.
The Bank of Japan, which has been pumping huge amounts of liquidity into the markets, is widely expected to act even if the others don't as the strong yen hurts the country's exporters, potentially deepening the already severe hit to the world's No. 3 economy.
The repercussions of the yen's volatility were being felt throughout currency markets. The euro was trading 0.7 percent higher at $1.4008. Europe's single currency was further supported by a solid bond auction in Spain _ the country raised euro4 billion at lower rates than its previous equivalent auctions.
Elsewhere in Asia, most markets traded lower in line with the Nikkei. Hong Kong's Hang Seng index fell 2 percent to 22,256.59 while South Korea's Kospi managed a marginal gain to 1,959.03. Mainland China's Shanghai Composite Index fell 1.1 percent to 2,897.30 while the Shenzhen Composite Index lost 1.8 percent to 1,284.96.
In oil markets, traders are keeping a close watch on developments in Libya as the regime of longtime leader Moammar Gadhafi looks like it's about to defeat the rebels and the international community continues to debate the merits of backing a no-fly zone over the country.
Benchmark crude for April delivery was up $2.52 to $100.50 a barrel in electronic trading on the New York Mercantile Exchange.
Pamela Sampson in Bangkok contributed to this report.