LAST week the yen climbed to record highs of 115.9 yen and 167.25 yen against the US dollar and sterling respectively. The Japanese unit capitalised on speculation early last week that the Group of Seven (G7) industrialised nations were wanting a stronger yen to reduce Japan's trade surplus. Subsequent official statements that a G7 agreement to support a stronger yen would not be reached allowed the dollar to recover slightly to close on Friday at 118.15 yen. As speculation over official backing for a stronger yen subsides the unit will relinquish more of the ground it has gained in the past two weeks, but it is unlikely to fall below 120 yen to the dollar. Japanese institutional investors selling sterling-denominated assets in favour of yen, to bolster their books ahead of the fiscal year-end on March 31, dragged sterling down to its record low. Japan's large trade surplus and good economic position compared with Britain and Europe will keep the Japanese unit firmly entrenched in its current uptrend against European currencies. The pound also established a new low against the German currency of 2.31 deutschemarks. Interest rate cut speculation, concern over the nascent British economic recovery and waning confidence in the Conservative government's economic policies have culminated in pound weakness against most currencies. This trend is unlikely to change in the near term. The deutschemark gave up gains made in the first half of the week to close marginally lower over the week at 1.644 deutschemarks to the dollar. The release of data showing a 2.3 per cent contraction in German M3 money supply in January, and an agreement by the main German banking union to settle for a 3.3 per cent pay rise for its members, triggered market speculation of a near term easing in interesting rates by the Bundesbank. This allowed the dollar to regain some of the ground it lost after the negative market reaction to US President Mr Bill Clinton's fiscal policy package. Until a further easing in German monetary policy materialises, which would revitalise the dollar's rally, the US unit seems set to trade in a short term range of 1.62 to 1.65 deutschemarks. Meanwhile, Canadian Prime Minister Mr Brian Mulroney announced his resignation after eight-and-a-half years in office. The Canadian dollar dipped on this news but quickly stormed back to its strongest levels since November. In the near term, the Canadian dollar should continue to strengthen towards 1.23 to the US dollar. James Mitchell is an economist at BNP International Financial Services (HK).