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 hit record lows versus the two currencies this week.

The central bank has been trying 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 weaker rupee in 2008 in view of higher oil prices in the international market and deteriorating current and trade account deficits in the country. In 2007, the rupee depreciated by less than two per cent against the dollar and nearly 12 per cent against euro.

Higher import payments, particularly that of oil in the wake of increasing international oil prices, has dragged the rupee down versus the US currency, resulting in the foreign exchange reserves to fall by $19 million to $15.55 billion in the week that ended on January 5. Since the end of 2007, the rupee has so far depreciated by around Rs1.75 against the American unit and by Rs2.60 versus the European single currency.

The dollar continued to remain in strong demand in the local currency market for the second consecutive week, due to growing law and order situation and political instability since the assassination of Benazir Bhutto. The local currency weakened sharply in the inter bank as well as open market this week. The week commenced on a negative note with the rupee moving both ways in the interbank market on January 7. It lost two paisa on the selling counter but managed to recover five paisa on the buying counter over its previous week close of Rs62.25 and Rs62.28. At the close of the day dollar was at Rs62.20 and Rs62.30.

The dollar maintained its overnight firmness in the interbank market on the second day of the week in review. However, the rupee moved both ways, sharply losing 20 paisa on the buying counter but recovering 15 paisa on the selling counter to trade at Rs62.40 and Rs62.45 on January 8. Persistent demand for dollar on the third trading day further exerted downward pressure on the rupee, which further shed ten paisa to trade at Rs62.50 and Rs62.54 against the dollar on January 9. Increasing dollar demand is continuously exerting downward pressure on the rupee, which now appears to touch new lows before the end of this week.

Falling trend persisted in the interbank market on the fourth trading day, the rupee further lost 15 paisa, changing hands versus the dollar at Rs62.65 and Rs62.70 on January 10. The rupee managed to hold its overnight levels against dollar on January 11, amid strong dollar demand and traded unchanged at its overnight level of Rs62.65 and Rs62.70. During the week, the rupee, however, suffered a decline of 40 paisa against the US currency in the inter bank market.

In the open market, the rupee slid sharply on January 7, and crossed Rs 62 barrier owing to the increasing demand for the US currency. The rupee lost 15 paisa against the dollar on the buying counter and another 20 paisa on the selling counter over the previous week's level of Rs61.70 and Rs61.80. At one stage, the rupee hit Rs 62.75 mark before closing the day at Rs61.95 and Rs62.10. The rupee extended its overnight weakness over the dollar on the second day of the week in review, further shedding 20 paisa for buying and 15 paisa for selling to trade at Rs62.15 and Rs62.25 on January 8.

On January 9, the rupee further lost 15 paisa and traded at Rs62.30 and Rs62.40. The rupee continued its slide versus the dollar, losing 20 piasa more on January 10, changing hands at Rs62.50 and Rs62.60. The dollar touched record lows in the open market on January 11, amid rising demand for dollar, as the rupee drifted lower sharply shedding 60 paisa in a single day to trade at Rs62.90 and Rs63.00 due to massive buying by the interbank market. This week, the rupee in the open market lost Rs1.20 against the American currency.

Versus the European single common currency, the rupee on the opening day of the week in review traded unchanged at its previous weekend's level of Rs90.35 and Rs90.40. It, however, drifted lower on the second trading day, when it was seen changing hands versus the euro at Rs90.65 and Rs90.75, down 35 paisa. The rupee continued its fall versus the euro on the third trading day, further shedding 28 paisa to trade at Rs90.93 and Rs91.03.

On the fourth trading day of the week in review, the rupee shed 14 paisa more versus euro and traded at Rs91.07 and Rs91.17. Finally on January 11, the rupee dipped further in relation to euro, sharply losing Rs1.18 to trade at Rs92.25 and Rs92.35 as the single European currency appreciated versus the major currencies in the world markets. During the entire week in review, the rupee lost Rs1.95 against the single European currency.

On the international front, the dollar rose on the week's opening day as dealers speculated that growing inflationary pressures could prevent aggressive Federal Reserve interest rate cuts despite surprisingly weak jobs growth in December.

In late New York trading, the dollar rose 0.6 per cent to 109.19 yen, but off a session peak of 109.74, amid volatile swings on the stock market. The euro appreciated almost 10 per cent against the dollar in 2007. It fell 0.4 per cent to $1.4688 on January 7, while the pound recovered from 4-1/2-month lows of $1.9654 to still trade down 0.1 per cent

On January 8, the US dollar slipped as a sharp drop in US stocks added to concerns about an economic recession and raised prospects of a deeper Federal Reserve interest rate cut this month. US stocks fell sharply after the phone company AT&T said it was experiencing softness in its consumer business, causing the dollar to reverse gains against the Japanese currency and touch session lows at 108.88 yen, according to Reuters data. In late New York trade, the dollar was down 0.3 percent at 108.92 yen, while the euro was up 0.1 per cent at $1.4705.

On January 9, the dollar rose shrugging off worries of a US recession, as investors started to focus on a potential growth slowdown in the euro zone after gloomy German industrial output and retail data. In late trade, the euro was down 0.3 per cent at $1.4661, after dipping to a session low of $1.4640. A late rally in the US stock market, as investors picked up beaten down shares, pushed the dollar to an intraday peak of 109.94 yen. It was last trading at 109.82 yen, up 0.8 per cent on the day. The euro appreciated nearly 10 per cent versus the dollar last year. Sterling fell 0.7 percent against the dollar to $1.9576, trading as low as $1.9555, the lowest level since late March.

On January 10, the US dollar fell sharply after Federal Reserve Chairman said the central bank was ready to take aggressive measures to support the US economy against the steep housing slump. That left investors betting that a half-percentage-point reduction in the federal funds rate was nearly guaranteed at the Fed's upcoming January 30 policy meeting, sending the dollar tumbling.

In late trade, the euro was up 0.9 per cent at $1.4798 after earlier seeing a session peak of $1.4814. The dollar dropped to an intraday low of 109.12 yen, before bouncing back to around 109.44 yen, about 0.3 per cent lower on the day. The pound was up 0.2 per cent at $1.9624. Prospects for further monetary easing in the US sparked a rally in the high-yielding Australian and New Zealand dollars. The Australian currency jumped 1.5 per cent to $0.8961, while the kiwi vaulted 1.7 per cent to $0.7850.

At the close of the week on January 11, the dollar dipped against the yen as renewed worries about US financial institutions' losses from credit market turmoil eroded investors' risk appetite. The dollar slipped 0.3 per cent to 109.02 yen having pulled back from the day's high of 109.72 yen. The euro was steady at $1.4812 hovering near a five-week high of $1.4825 hit on EBS a week ago and clinging to its overnight gains. The pound fell as low as $1.9485, a trough since last March, though it then recovered to $1.9580, still down 0.2 per cent on the day.