Disappointing economic indicators, both nationally as well as internationally, are having its toll on the country’s trade and payment position.

Rising imports, amid slow growth in exports has sharply deteriorated trade deficit in the first seven months of the current financial year, which is exerting downward pressure on the rupee/dollar parity. The State Bank of Pakistan has announced tight monetary policy for the next six months (Jan-Jun 2008) this week, as a step to combat rising inflation and deteriorating trade deficit, which has sharply widened in the first six months of the current financial year. The central bank has also raised its discount rate by 50 basis points to 10.50 per cent and asked the government to restricted heavy borrowings from the bank, which is increasing fiscal deficit.

There are divergent views amongst the government and private economists about the current economic situation. The government economists are of the view that the situation is under control and the trade and budget deficits are under manageable limits with comfortable foreign exchange reserve position. Many private economists, businessmen and traders on the other hand are of the opinion that the economic indicators are fast deteriorating. There has been a sharp outflow of foreign investment in the past four weeks, which along with slowing exports and rising imports could lead to decline in foreign exchange reserves. There will be a difficult time for the government in the months ahead.

Prevailing situation has put the rupee/dollar parity under pressure. The local currency market observed mixed sentiments with the rupee moving both ways against the dollar and the euro this week. In the inter bank market, the rupee lost it’s weekend firmness on the opening day of the week in review due to higher demand for dollars. The local currency posted a sharp fall against the American currency, shedding 18 paisa on the buying counter buying and another 22 paisa on the selling counter, changing hands at Rs62.60 and Rs62.65 after ending last week at Rs62.42 and Rs62.45.

However, on the following day, the rupee managed to stage a moderate recovery gaining five paisa on slight improvement in dollar supplies on January 29. At the close of the day, the dollar was at Rs62.55 and Rs62.60. The local currency again reversed its upward trend on the third trading day of the week in review as continued demand pushed the dollars’ rate higher. However, the rupee posted a marginal fall of five paisa against dollar on the buying counter, while shedding three paisa on the selling counter to trade at Rs62.60 and Rs62.63 on January 30.

The rupee was unable to recover its lost ground versus the dollar due to continued dollar buying in the inter bank market on January 31, when it lost four paisa for buying and another three paisa more on the selling counter changing hands versus the dollar at Rs62.64 and Rs62.66. The rupee weakness versus the dollar extended further on February 1, as importers requirement to cover payments increased dollar demand further. The rupee shed nine paisa for buying and 10 paisa for selling and traded at Rs62.73 and Rs62.76. During the week, the rupee in the inter bank market suffered 31 paisa loss versus the US currency.

In the open market, the rupee commenced the week on stable note and maintained its weekend level against the dollar on the buying counter but it shed five paisa on the selling counter and traded at Rs62.65 and Rs62.80 on January 28. On January 29, the rupee further lost five paisa on the buying counter but continued unchanged and traded at its overnight level on the selling counter. At the close of the day, the dollar was trading at Rs62.70 and Rs62.80.

The rupee continued unchanged at its overnight level of Rs62.70 and Rs62.80 on January 30. However, on January 31, the rupee managed to display strength over the dollar, as it gained five paisa on the buying counter but stayed unchanged at its previous day’s close rate, trading at Rs62.65 and Rs62.80. On February 1, the local currency reverted to its overnight position after posting five paisa loss on the buying counter. It, however, remained unchanged on the selling counter and traded at Rs62.70 and Rs62. 80. This week, the rupee in the open market maintained a stable trend versus the dollar, amid fluctuations.

Versus the European single common currency, the rupee commenced the week on a happy note picked up 12 paisa on the buying counter and 14 paisa on the selling counter to trade at Rs91.30 and Rs91.40 on January 28, after closing previous week at Rs91.42 and Rs91.54. However, the rupee posted sharp losses versus the Euro on January 29, when it lost 95 paisa, changing hands at Rs92.15 and Rs92.25.

The rupee continued to suffer losses against euro on the third trading day, shedding 10 paisa more over the previous day’s close and traded at Rs92.25 and Rs92.35 January 30. On January 31, the local currency extended its overnight weakness versus the European common currency losing 65 paisa to close the day at new lows during the week. At the end of the trading session the rupee was at Rs92.90 and Rs93.00. On February 1, the rupee recovered 10 paisa versus euro to trade at Rs92.80 and Rs92.90 bringing cumulative losses against the European single common currency to Rs1.38 this week.

In the international financial markets, the dollar fell against most major currencies on January 28, with dealers anticipating a further cut in interest rates this week to boost US economic growth. Last week, officials slashed benchmark lending rates unexpectedly by three quarters of a percentage point, weighing on the dollar.

In New York trade, the dollar rose 0.2 per cent to 106.96 yen. The euro was up 0.7 per cent at $1.4775, rising for the fourth session in the last five. Against the Swiss franc, the dollar was down 0.7 per cent to 1.0895 francs. Sterling edged higher against a soft dollar. It was up at $1.9860 from around $1.9825 last week close.

On January 29, the dollar edged up against the euro and yen after mixed US economic data prompted traders to trim bets against the greenback ahead of this week’s interest rate decision by the Federal Reserve. The euro slipped to $1.4772, down 0.1 per cent from the previous day’s close. The dollar had fallen against the euro in four of the last five trading sessions after the Fed startled markets by slashing benchmark rates by 75 basis points to 3.5 percent in an emergency move last week. The dollar rose 0.2 per cent to 107.05 yen, near a session peak of 107.23 yen hit after the durables data. Sterling was trading at $1.9866 after earlier reaching $1.9929 - its best level since December 31 - and up from around $1.9838 late in New York on January 28.

On January 30, the dollar sank to a two-month low against a basket of currencies after the Federal Reserve cut benchmark interest rates a half percentage point and warned more may be needed to support the faltering US economy. The euro surged 0.8 percent to $1.4906 before easing to $1.4877. The dollar fell 0.6 percent to 106.40 yen and hit a record low of 1.0824 Swiss francs. The pound was trading down 0.1 percent at $1.9881, having touched $1.9949, its highest since the start of the year and well above the $1.9335 it fell to last week.

On January 31, the dollar crept higher against the euro as the euro had drifted down to $1.4864, about 0.1 percent below its level on January 30. Overnight, the euro hit a global session high of $1.4914. Against the yen, the dollar fell 0.1 percent to 106.33 yen. The greenback fell 0.2 percent to 1.0801 Swiss franc, near a record low of 1.0759 francs hit earlier. Sterling rose as high as $1.9925 from around $1.9885, although speculation of a stronger reading had already lifted the pound up from around $1.9870.

At the close of the week on February 1, the dollar hovered in range of a record low against the euro before crucial US economic data due later in the day that will offer hints on how close the US economy is to a recession. The euro was little changed and hovered near $1.4865, in range of a record high of $1.4968 hit on EBS in November. The dollar held steady against the yen at 106.36 yen, and dipped a little against the Swiss franc to 1.0781 francs, within half a cent of its all time low struck on January 31. Sterling lost almost two cents against the dollar as investors braced for a UK interest rate cut next week and slower economic growth in the months to come. It was down nearly 1 percent - or two cents - on the day at $1.9679.