Trading in the interbank market during the last week remained suspended for four days due to weekly as well as Eid holidays from December 20 to December 23. As a result, the market operated for only three days.

In the three days trading, the rupee displayed strength against dollar and euro, amid fluctuations. During the entire trading period, dollar inflows remained strong as remittances from overseas Pakistanis continued pouring in ahead of Eidul Azha.

At the same time strict monitoring by the State Bank in the past few weeks did not allow the rupee to fall sharply against the dollar. The SBP’s decision to decrease the amount of cash reserves that banks have to maintain with it against their foreign currency deposits helped the rupee to recover from a three-year low last week. Since then the rupee has maintained its upward rising trend in the inter bank as well as open market.

The rupee in the interbank market opened the week on a positive note, showing healthier trend in dollar inflows. Consequently, it managed to gain 13 and 14 paisa against the dollar on the buying and selling counters, respectively, changing hands at Rs60.87 and Rs60.89 on December 17. The rupee had closed previous week at Rs61.00 and Rs61.03. Heavy inflows of remittances from overseas Pakistanis supported the rupee against the greenback.

The rupee further extended its gain on the second day of trading, as it picked up 15 paisa more against the dollar, which traded at Rs60.72 and Rs60.74 on December 18. No hectic buying of dollar was observed on the third trading day, while dollar supplies continued to strengthen. The dollar in the early hours of trading was seen changing hands at Rs60.60 and Rs60.80 on December 19. In the interbank market, the rupee recovered 26 paisa against the dollar in the past one month.

In the open market, the rupee maintained its weekend trend and gained five paisa against the dollar, which traded at Rs60.85 and Rs60.95 on December 17, against previous week close of Rs60.90 and Rs61.00. The rupee further picked up 20 paisa on December 18, when the dollar was quoted at Rs60.65 and Rs60.75. On December 19, the parity was unchanged in the early trading hours. During the last one month, the rupee in the open market managed to recover 45 paisa against the dollar. The rupee was at Rs60.85 and Rs60.95 in the corresponding week last month.

The rupee continued its upward trend against the euro. It gained 107 paisa on December 17, when the euro traded at Rs86.23 and Rs86.33 against last week close of to Rs87.30 and Rs87.40. However, the rupee failed to maintain its overnight firmness on the second day and lost 52 paisa to trade at Rs86.75 and Rs86.85 on December 18. In the morning session of December 19, the rupee again weakened against the euro, shedding 10 paisa and traded at Rs86.65 and Rs86.75. Over the past month, the rupee has so far lost Rs3.32 against the euro. The euro was at Rs86.23 and Rs86.33 in the corresponding week last month

In the international financial market, the dollar rose against the euro on the opening day of the week, boosted by year-end transactions as well as speculation that US inflation may cause the Federal Reserve to be less aggressive in cutting interest rates next year. But tight credit conditions and fear of slower US growth weakened the greenback elsewhere, with the yen and Swiss franc rising as investors unwound carry trades that involve borrowing these currencies to fund purchases of higher-yielding assets.

The market mood is likely to remain mildly favourable for the dollar heading into year-end, partly on the view that rising US inflation may keep the Fed from cutting benchmark short-term rates at its next policy meeting on January 30. The Fed is still expected to lower rates in 2008 to shield the economy from a slumping housing market, but analysts think lurking price pressures could force officials to adopt a slower pace of monetary easing. This would not significantly erode the dollar’s yield advantage, since global growth worries are likely to prompt other major central banks to cut rates or hold them steady.

An unexpected surge to $114 billion in US long-term capital inflows in October, well above September’s $15.4 billion inflow, lent some dollar support, though analysts were sceptical about the data’s relevance. In New York trade, the euro traded down 0.2 per cent at $1.4393, after earlier dipping to a 1-1/2-month low of $1.4332 in overseas trade. But the dollar fell 0.4 per cent to 112.94 yen and 0.3 per cent to 1.1490 Swiss francs. The euro also fell 0.6 per cent to 162.54 yen. Sterling gained 0.2 per cent to 2.0204.

On December 18, the dollar inched up, closing in on a seven-week high against the euro on views that mounting US inflation risks would limit the extent of any future Federal Reserve interest rate cuts. Data last week showing a surge in US consumer prices kept the dollar near a six-week high versus the yen, and traders said dollar buying would linger as investors cover short positions in the currency ahead of year-end book closings.

Other market participants said that traders were simply taking a breather from recent dollar selling that drove the US currency to a record low against the euro and a 2-1/2-year trough to the yen late last month.

The euro was little changed from late US trade at $1.4398, holding near previous day’s low of $1.4330 at what was the weakest since late October. The dollar edged up 0.4 per cent to 113.24 yen and was near the six-week high of 113.60 yen. The single currency climbed 0.3 per cent to 163.05 yen. The Japanese currency also slipped as a partial recovery in Asian stocks prompted some speculators to take on risky carry trade bets, where the low-yielding Japanese currency yen is used to buy assets in higher-yielding ones.

Market participants said that the US dollar would likely find near-term support on last week’s data suggesting that the Fed will have to stay vigilant on inflation risks.

At the same time, concerns about global credit problems and sluggishness in the US economy amid climbing prices have taken a toll on equities, which some in the market say could chip away at dollar support. The Fed is expected to lower rates in 2008, after cutting them by a total of a full percentage point since September to 4.25 per cent, to shield the economy from problems in the subprime mortgage market as well as broad weakness in the housing market.

The high yielding Australian dollar gained 0.6 per cent to US$0.8623. It drew support after minutes from the Reserve Bank of Australia’s December policy meeting showed it saw strong reasons for raising interest rates, although it held off from doing so because of the global credit squeeze.

Sterling meanwhile, sold off broadly after UK inflation data came in below expectations, leaving the door open for more Bank of England rate cuts in 2008. It slipped towards a 2-1/2 month low versus the dollar as a weaker-than-expected UK inflation release left the door open for more interest rate cuts in early 2008. It was down 0.2 per cent at $2.0176, edging down towards the previous day’s 2-1/2 month lows of $2.0099.