In 2008, weak macro economic indicators, political uncertainty, and law and order situation together with heavy load shedding amid acute power crisis brought entire business and trading activities in the country to its low ebb.

Inflationary pressure remained strong in the economy, despite some decline in it globally. International oil prices touched their historic highs in September/October. Imports became very costly. Government borrowings from the State Bank of Pakistan attained new highs. Investments and both, domestic as well as foreign came to almost standstill. Capital started flowing out of the country.

Pakistan’s external account remained under stress through out the year, as acceleration in the growth of the current account deficit, and sharply reduced financial and capital account inflows drew the country’s foreign currency reserves to perilously low levels, according to the State Bank of Pakistan. Pakistan’s foreign exchange reserves had came under severe pressure as it fell dramatically from over $15 billion to as low as around $4 billion by October. Many analysts at one stage started fearing that the country would default on external debts.

The prevailing situation until October had its impact on the rupee, which fell sharply against major currencies during the year. The rupee fell to as low as Rs 84 against the dollar and over Rs 120 against euro at one point. The situation improved towards the close of the year, following aid agreement with the IMF and several measures taken by the State Bank of Pakistan in November onwards. Foreign exchange reserves improved significantly touching $9.7 billion by December 27. As a result, pressure on rupee/dollar parity also improved to greater extent. At the close of the year, the rupee fell by 21.5 per cent against the US dollar and by about 19 per cent against the euro.

Meanwhile, falling trend was observed on the currency market on the opening day of this week as dollars were short in demand due to the closure of most financial centres in the international market on account of Christmas and New Year holidays. In the interbank market, year end demand for dollar was also high for making import payments. This exerted downward pressure on the rupee/dollar parity in the inter bank market. The rupee lost 20 paisa against dollar for buying and 15 paisa for selling to trade against the dollar at Rs 79.30 and Rs 79.35 on December 29. The rupee had closed last week at Rs 79.10 and Rs 79.20.

The rupee gave up its weakness against dollar on the second trading day on increased dollar inflows and recovered 20 paisa to trade at Rs79.10 and Rs79.15 on December 30. Finally the year closed on a happy note, with the rupee gaining another five paisa on the buying counter, while remaining unchanged on the selling counter and trading against the dollar at Rs 79.05 and Rs 79.15 on December 31. The trading in the inter bank market remained suspended on January 1, due to banks closure for public on account of Bank Holiday announced by the State Bank of Pakistan.

Finally, the week ended on a happy note with the rupee further gaining 5 paisa on the buying counter and 10 paisa on selling counter, despite strong demand for dollars by importers who reportedly bought $100 million to cover their quarterly payments. At the close of the day, the dollar traded at Rs79.00 and Rs79.05. At this level, the rupee showed an appreciation of 4.8 per cent against the dollar. The dollar had attained historic peak at Rs82.85 in the third week of October last year. During the week ended January 2, the rupee in the interbank market also gained 10 paisa against the dollar.

In the open market, the rupee lost 30 paisa versus dollar on the opening day of the week, with the dollar trading at Rs79.30 and Rs79.80 on December 29, against last week close of Rs79.00 and Rs79.50. On December 30, the rupee extended its overnight losses and traded against the dollar at Rs79.10 and Rs79.70 after shedding 10 paisa on the buying counter and 20 paisa on the selling counter. Towards the close of 2008 on December 31, the rupee, however, managed to recover its past two days’ losses after it gained 60 paisa on the buying counter and another 70 paisa on the selling counter to trade against the dollar at Rs78.50 and Rs79.00.

The year 2009 began on a negative note with the rupee posting fresh losses of 30 paisa against the dollar which was seen changing hands at Rs78.80 and Rs79.30 on January 1. The rupee extended its overnight losses, further shedding 10 paisa against the dollar, which traded at Rs78.90 and Rs79.40 on January 2. On cumulative basis, the rupee in the open market this week managed to gain 20 paisa against the dollar. It was also higher by 6.5 per cent against the lowest level attained in October.

Versus the European single common currency, the rupee commenced the week on a negative note. It was sharply lower at Rs 110.65 and Rs 110.80, after shedding 185 paisa on the buying counter and another 160 paisa on the selling counter over the previous weekend’s Rs 108.80 and Rs 109.20. However, the rupee managed to recover from its overnight weakness on the second trading day, gaining 75 paisa for buying and 70 paisa for selling to trade at Rs 109.90 and Rs 110.10 on December 30.

On December 31, the rupee extended its overnight gains versus euro, which was changing hands at Rs 109.60 and Rs 109.80 after gaining 30 paisa more towards the close of the year. The rupee entered the new year on a happy note, amid thin trading, making modest recovery of up to 60 paisa on the fourth trading day, when euro was trading at Rs109.00 and Rs 109.20. On January 2, the rupee further gained 30 paisa for buying and 20 paisa for selling to trade at Rs 108.70 and at Rs 109.00. This week, the rupee recovered 20 paisa against the European single common currency.

In the international financial market, the dollar rose against the euro, reversing early losses in a late surge as investors snapped up the greenback in thin trading after the single currency failed to sustain gains fuelled by fighting in the Middle East. In New York, the euro was down 0.6 percent against the dollar at $1.3977 after earlier trading as high as $1.4361. Against the yen, the dollar was down 0.2 percent at 90.55 yen, while the US currency edged up versus the Australian dollar to US $0.6867. The dollar shed 0.8 percent against the Swiss franc to 1.0587 francs. The pound also fell to $1.4456 versus the dollar, the lowest since May 2002.

On December 30, the US dollar fell against a basket of currencies, pressured by position adjustments ahead of the year-end and its diminishing yield appeal. With many players winding up for the New Year’s holiday, currency trading has been mainly driven by technical factors rather than fundamentals, while thin market conditions have added to volatility. The euro rose 0.7 percent to $1.4076. Against the yen, the dollar slipped 0.3 percent to 90.25 yen. In other currencies, sterling fell as low as $1.4385, its weakest level since early 2002, according to Reuters data. It was last down 0.4 percent at $1.4427.

On December 31, the US dollar posted its first yearly gain against a basket of currencies since 2005 as the worst financial crisis in 80 years led investors to take refuge in the greenback. In early New York trading, the euro was down 0.8 percent to $1.3956 after rising above $1.60 in July. The euro fell about 4.5 percent against the greenback this year - its first annual drop since 2005, while the US dollar gained roughly 6 percent versus a basket of currencies. The dollar was last up 0.6 percent at 90.84 yen after trading as low as 87.15 to the dollar earlier this month, according to Reuters data. The US dollar started the New Year on a subdued note as tentative signs of an easing in risk aversion benefited higher-yielding currencies like the Australian and New Zealand dollars.

The US dollar was firmer at the start of 2009 on January 2 as investors sold the euro after data showed deepening recession in the eurozone. In New York, the euro was down 0.3 percent against the dollar at $1.3936, having earlier hit a session low of $1.3841. The dollar was last up 0.2 percent at 90.96 yen, after trading as high as 91.45. The pound fell against the euro and the dollar. The pound lost 0.4 percent versus the dollar to $1.4541, after falling as low as $1.4377in London. Volumes remained very thin, however, with many investors still away after New Year holiday. Sterling was the stand-out loser among major currencies in 2008, dropping around 25 percent against the dollar over the year.