The local currency market was badly hit towards the end of the year 2007, after law and order situation deteriorated and gave rise to political uncertainty following the assassination of Ms Benazir Bhutto. The impact of Benazir’s killing was widely felt globally.

The local currency is under tremendous pressure against the dollar and euro. The rupee attained record lows versus the two currencies last week. Dollar supply was short, while the demand was on higher side.

Due to prudent SBP policies and strategy, however, the rupee managed to trade with firmness against the dollar despite remaining under demand pressure. The central bank had tried its best to resist sharp declines in rupee versus the dollar during the past six months, but now some leading currency dealers fear a slightly week rupee in 2008 in view of higher oil prices in the international market and deteriorating current and trade account deficits.

They expect the rupee to breach Rs63 barrier towards the end of 2008. In 2007, the rupee depreciated by less than two per cent against the dollar and nearly 12 per cent against euro.

After a long weekend in the previous week, the local currency market opened this week on a negative note as the rupee in the inter bank market lost 66 paisa over its previous week close levels of Rs61.32 and Rs61.34, hitting the six-year low level against dollar to trade at Rs61.95 and Rs62.00 on December 31.

Due to local bank holiday due to bank closing, as well as closure of the international financial centres, being New Year Holiday on January 1, dollar supply in the market remained short. Currency trading remained suspended on the second day of the week in review.

When the trading in inter bank market resumed on the third trading day of the week, mixed sentiments were observed, with the rupee moving both ways.

As the dollar supply improved, the rupee managed to stage a turnaround, recovering 12 paisa on the buying counter and another 15 paisa on the selling counter, changing hands against the dollar at Rs61.83 and at Rs61.85 on January 2. On January 3, the rupee again lost its ground versus the dollar, as demand for US currency in the inter bank market shot up despite improved dollar supplies. The rupee lost 9 paisa and traded at Rs61.92 and Rs61.94.

The rupee suffered a sharp decline on the fifth trading day of the week in review, again touching the six-year low level against the dollar and breaking Rs 62 barrier in a short span of time, as importers demand for dollars mounted.

The dollar traded at Rs62.20 and Rs62.25 on January 4. In the entire week, the rupee suffered a fall of 88 paisa against the dollar in the inter-bank market.

In the open market, the rupee/dollar parity continued its downtrend during the week in review. On the opening day of the week, the rupee extended its weakness further and lost 25 paisa, changing hands versus the dollar at Rs61.15 and Rs61.25 against previous week close of Rs60.90 and Rs61.00.

The inter bank market was closed on January 1, being bank holiday. The open market, therefore, was under buying pressure as it was experiencing short supply of dollars. The rupee traded at Rs61.30 and Rs61.40 after shedding 15 paisa more on January 1.

On January 2, rupee decline versus the dollar persisted on the third day of trading. It lost five paisa on the buying counter and another 10 paisa on the selling counter to close the day at Rs61.35 and Rs60.50.

The rupee further extended its losses on January 3, when it lost another five paisa for buying but it managed to stay unchanged at its overnight levels for selling and traded at Rs61.40 and Rs60.50.

On January 4, the rupee further shed 10 paisa against the dollar, which was quoted at Rs61.50 and Rs61.60. During the week in review, the rupee in the open market lost 50 paisa against the American currency.

Verses the European single common currency, the rupee posted a sharp decline of Rs2.35 on the first trading day of the week in review, when it traded at Rs 89.65 and Rs89.75 against last week’s Rs87.30 and Rs87.40.

The rupee, however, managed to recover from its overnight losses versus the euro on the second trading day, when it traded at Rs89.00 and Rs89.10 after gaining 35 paisa over the previous day’s close. On the third trading day, the rupee failed to hold its overnight firmness against the euro, shedding 40 paisa and changing hands at Rs 89.40 and Rs 89.50 on January 2.

The rupee continued its fall versus euro on the fourth trading day. It lost 40 paisa more on the buying counter and another 49 paisa on selling counter to trade at Rs89.80 and Rs89.99 on January 3.

Finally on the fifth trading day of the week in review, the rupee did not show any change against the euro and stayed at its overnight levels of Rs89.80 and Rs89.90. This brings cumulative fall in rupee value versus euro this week to Rs2.50.

In the international financial market, the US dollar fell across the board in 2007 and suffered the deepest losses against the Canadian dollar, among the world’s most heavily traded major currencies.

The greenback registered its biggest decline against the Canadian currency in four years, down almost 15 per cent and falling below parity for the first time in 31 years.

The extent of the US currency’s weakness in 2007 was largely not predicted. The 12-month forecast for the euro was $1.32 a year ago. But it is currently trading at around $1.46.

The latest data from the Commodity Futures Trading Commission showed speculators reducing their net short dollar position to its smallest since June, suggesting there is plenty of scope for more dollar selling in the future.

Credit concerns and geopolitical jitters - related to instability in nuclear-armed Pakistan - also kept investors away from carry trades, where they borrow at low rates in yen and Swiss francs to buy higher-yielding currencies.

Following last weekend’s weaker than expected US new home sales data, futures markets are now pricing in a 90 percent chance of a quarter percentage point Federal Reserve rate cut to 4.0 percent in January 2008.

The dollar entered 2008 on a negative note. It fell versus a basket of major currencies on the opening day of the week in review, keeping it on track for its worst annual performance in four years, as investors speculated that 2008 could bring slower US economic growth and lower interest rates.

On December 31, the dollar rallied against the euro but slipped against the yen in the final trading day of 2007, though dealers resisted making big bets until volume increases after New Year’s Day.

The euro traded 0.8 per cent lower from last week close to $1.4595, after falling as low as 1.4570, according to Reuters data. In November, the euro rose to an all-time high of $1.4968. Against the yen, the dollar fell 1 percent to 111.46 yen. The dollar climbed 0.6 percent to 1.1337 Swiss francs but has fallen 14.7 per cent this year to C$0.9934.

Thin liquidity exaggerated market moves, with Japan and several European countries already closed and all major financial centres celebrating new-year holiday on January 1.

The single European currency has appreciated almost 10.5 percent against the dollar since the start of 2007, surging at one point to within reach of 1.50 dollars. The dollar bounced higher on the last day of the year.

On January 2, the dollar fell as crude oil surged. The dollar’s drop against the yen accelerated, with the decline extending past two per cent at one point, as crude prices reached $100 a barrel, triggering a further reduction in risky trades.

In New York, the dollar tumbled to the lowest level in more than a month against the yen to 109.31 yen before edging back to 109.45 yen, down 1.9 per cent on the day. The euro was up 0.9 percent at $1.4721, after rallying more than 10 percent in 2007. The dollar fell 1.5 percent to 1.1167 Swiss francs. Sterling slipped 0.3 per cent to $1.9805.

On January 3, the dollar fell against the euro and yen as investors continued to bet that the US economy’s slowdown will give the Federal Reserve little choice but to cut interest rates.