The rate differentials dictating foreign exchange markets were starkly displayed yesterday as the yen fell to a record low on the euro and sterling hit a 14 year dollar high.

The euro was valued at a new record of ¥158.33 in trading on Tuesday before falling back to ¥158.43, while the pound touched $1.9915 before falling back to $1.9822.

Sterling trading was boosted by expectations of a further rate rise in the coming months, expectations which also informed euro trading after strong French economic figures.

Bank of England governor Mervyn King said that the "balance of risks to output growth and inflation has shifted towards the upside", in a speech on Tuesday.

Pre-empting inflationary pressures with early rate rises ensured that the bank "ultimately needs to raise interest rates by less than would be the case if we delayed", he added.

Conversely, market analysts said that the dollar bounce in the first weeks of the year has already lost momentum as traders believed that the US was overly "hawkish" on rates.