Remittances by overseas Pakistanis increased to $2.35bn in July-October of 2008-09, showing an increase of 12.71 per cent over the same period of last year. Despite these remittances and $7.1bn exports, the external current account posted a wider deficit of $5.9bn during the period under review.

This was large due to strong import demand on account of rising international commodity prices. The import bill of $12.9bn was higher by 35.2 per cent in the July-October compared to a just 4.4 per cent growth in the corresponding period of last year.

With financial inflows slowing down and rising capital outflows, the external current account deficit had to be financed by drawdown of SBP’s foreign exchange reserves. Consequently, the country’s foreign exchange reserves fell $20 million to $6.74bn last week. The SBP foreign exchange reserves have depleted by $5.0bn with a cumulative depletion of $10.7bn up to November 10, 2008 since end-October 2007 when SBP reserves were at their peak of $14.3bn.

The rupee came under mounting pressure. The dollar-rupee exchange rate has depreciated by 15.3 per cent since the beginning of FY09. The rupee has fallen by over 22 per cent this calendar year. Faced with falling forex reserves, rising inflation, persistent government borrowing and deteriorating macroeconomic imbalances, the State Bank of Pakistan, for the seventh time, raised its policy rate from 13 per cent to 15 per cent. This has sent negative sentiments amongst the traders and business community. Many leading economists have strongly criticised the SBP’s latest move.

The SBP has also decided to pump more liquidity around Rs319bn to meet exceptional liquidity requirements of the banking system and to control speculative trading in currency market. But there is unrest amongst the trader and they are not happy over some of the measures taken by the central bank in recent weeks. Small traders are holding responsible the country’s current economic conditions and deteriorating law and order situation for the decline in trade activities, as retail sales have reduced to 25 percent in recent weeks in the city’s major markets.

Meanwhile, the crackdown on some exchange companies involved in cross-border smuggling of dollars had a positive impact on the rupee value. The rupee, which touched historic lows in the recent weeks against the greenback, strengthened this week versus.

In the inter-bank market, the rupee was seen making sharp recovery against the dollar on the opening day of the week. It posted 32 paisa gain over the previous weekend’s levels of Rs81.10 and Rs81.15 to trade against the dollar at Rs80.78 and Rs80.83 on November 10. The rupee continued to dominate dollar for the second consecutive day strengthening its muscles further against the American currency on November 11, when dollar was changing hands at Rs80.55 and Rs80.60 after rupee posted fresh gains of 23 paisa. However, there was lack of demand for dollar amid dollar smooth supply.

On November 12, the rupee/dollar parity maintained a stable trend. There was a further rise of 15 paisa for buying and 10 paisa for selling with dollar changing hands at Rs 80.40 and Rs 80.50 on November 13. The rupee/dollar parity remained intact on November 14, as rupee expanded its firmness versus the dollar on the fourth trading day, further gaining 27 paisa on the buying counter and 22 paisa on the selling counter to trade at Rs80.18 and Rs80.23. During the week in review, the rupee in the interbank market managed to recover 92 paisa against the dollar.

In the open market, the rupee rebounded sharply against the dollar amid dull trading on the opening day of the week. There was lesser number currency buyers in the market following government action against foreign exchange companies involved in illegal currency trading. As a result, the rupee sharply gained Rs1.90 for buying and Rs2 for selling over the last weekend’s Rs80.90 and Rs81.30, changing hands against the dollar at Rs79 and Rs79.30 on November 10, a level last attained on October 10 this year. On November 11, however, the rupee did not show any change on the buying counter but shed 50 paisa on the selling counter, with dollar changing hands at Rs79.0 and Rs79.80.

The rupee moved both ways against the dollar on November 12. While it gained 15 paisa on the buying counter, it lost 5 paisa on the selling counter. The dollar traded at Rs78.85 and Rs79.85. Trading activity picked up for the first time this week on November 13. The demand for dollar was on the higher side. As a result, the rupee came under pressure. It posted fresh losses against the dollar, which was quoted at Rs79.50 and Rs 80.50, after rupee slipped by 65 paisa. On November 14, the rupee maintained its overnight levels against dollar and traded unchanged at Rs79.50 and Rs80.50. This week, the rupee in the open market managed to recover Rs1.40 on the buying counter and Rs1.20 on the selling counter against the dollar.

Versus the European single common currency, the rupee opened the week on happy note as it posted sharp gains of Rs2.40 on the first trading day of the week, changing hands at Rs101.00 and Rs102 on November 10. The rupee had closed last week at Rs103.40 and Rs104.40. The rupee retained its overnight firmness against the euro on November 11, further gaining 70 paisa to trade at Rs100.30 and Rs101.30. Upward rising trend in rupee/euro parity persisted on November 12. The rupee further recovered 200 paisa against the euro, which traded at Rs98.30 and Rs99.30.

However, the trend reversed on November 13, with the rupee suffering 70 paisa decline against the euro. At the close of the day, the euro was at Rs99 and Rs100. The rupee overnight weakness versus euro persisted on November 14, when it shed Rs1.85 on the buying counter and Rs1.10 on the selling counter and traded against the euro at Rs100.85 and Rs101.10. This week, the rupee managed to gain Rs2.55 paisa on the buying counter and Rs3.30 paisa on the selling counter.

On the international front, the euro was nearly flat to the dollar at $1.2730. It had jumped earlier to an intraday high at $1.2927 on November 10. Against the yen, the dollar gave up early gains and last traded down 0.6 per cent at 97.70 yen. Some traders said trading volume was lower than usual as the US bonds and futures markets closed earlier ahead of Veterans Day holiday on November 11. Sterling also erased gains against the dollar. The UK currency was flat at $1.5668, off from a session high of $1.5884, according to Reuters data.

On November 11, the euro also fell earlier to a two-week low at $1.2508 and last traded down 1.6 per cent at $1.2528. The yen traded broadly higher as worries over slowing growth kept up the pressure on carry trades, in which low-yielding currencies like the Japanese currency are used to buy assets in higher-yielding ones. The dollar last traded down 0.3 per cent at 97.74 yen and the euro fell 1.8 per cent to 122.51 yen. The Australian dollar traded 1.5 per cent lower at US $0.6586. The pound fell more than 1 per cent to hit a two-week low of $1.5425.

On November 12, the dollar was last down 2.8 per cent at 94.97 yen, after falling as low as 94.49 yen, the lowest since October 28, according to Reuters data. Sterling fell below $1.50 versus the dollar to a near 6-1/2 year low. The pound also hit its lowest since June 2002 at $1.4898. Sterling’s fall below $1.50 means the UK currency has now lost a quarter of its value against the dollar in barely over three months.

On November 13, the euro was up 3 percent against the dollar at $1.2836, clawing back from the two-week low of $1.2389 hit earlier in the global session. The dollar was up 3 percent versus the Japanese yen at 97.60 yen. The pound also tumbled against the dollar, hitting a 6-1/2-year low. Against the dollar, the pound fell 0.8 percent at $1.4807, having earlier hit a low of $1.4775, its weakest since mid-2002.

At the close of the week on November 14, the dollar fell 0.6 percent to 97.10 yen after having jumped as high as 98.30 yen on November 13 from the lows below 95 yen touched earlier during that day. The single European currency edged down 0.1 percent to $1.2755 but stayed above a two-week low of $1.2388 hit the previous day. The pound fell 0.8 percent against the dollar to $1.4746, not far off a 6-1/2-year low of $1.4555 hit on November 13.