Economic and political uncertainty and increasing oil prices in the world market pushed up the demand for dollars, as a result of which the American currency breached the barrier of Rs73 in both inter-bank and open markets this week. The central bank has reportedly injected $150 million in the market since the start of the month to satisfy mounting demand for the greenback. The demand has accelerated sharply this week.

Rising oil prices in the international market, shortage of essential food items due to poor agriculture growth and low FDIs are some of the major factors putting immense pressure on exchange rate. The country’s trade deficit for the year ended June 2008 touched record level exceeding $20bn. Increased dollar buying to meet rising import payment bill, amid short dollar supplies, resulted in sharp decline in the rupee value against the dollar and euro.

With inflation at a three-decade high, sharply rising oil prices, widening twin deficits and depleting reserves, the economy is presenting a bleak outlook. Recent bombings in Islamabad and blasts in Karachi further compounded the law and order situation in the country. This adversely affected dollar inflows, exerting substantial pressure on the rupee. The rupee/dollar parity underwent sharp decline amid panic trading in the local currency market this week, touching historic lows.

In the inter bank market, the rupee dipped to a new all time low versus the dollar crossing Rs72 mark on the opening day of the week, after losing more than 185 paisa against the dollar due to panic buying by the importers. It hit Rs72.05 in early trading session before closing the day at Rs70.95 and Rs71. Since the beginning of July, the rupee has fallen significantly against the dollar. The rupee/dollar parity continued its downtrend on the second trading day, when the rupee came under renewed pressure on speculative trading.

Mounting dollar demand pushed the rupee further, which crossed Rs73 barrier against the US currency before closing the day at Rs72.85 and Rs72.90 on July 8, about 195 paisa lower against the previous day’s close. The State Bank of Pakistan did not intervened in the inter-bank market despite hectic dollar buying on the first two trading days. It, however, announced tight measures to resist further decline in rupee value against the dollar after the closure of the day’s business on July 8.

In line with the measures, the central bank will make 100 per cent oil payment. It suspended afternoon session for all types of foreign exchange transactions by authorised dealers with their customers and in the inter bank market. In another move, the SBP suspended Forward Cover Facility (FCF) against imports cutting advance payment against imports to 25 per cent with immediate effect to rationalise the foreign exchange markets. It also reduced the time for all types of foreign exchange transactions by authorised dealers with their customers and in the inter bank market.

The SBP action had a positive impact on the rupee on July 9, when it managed to make a strong recovery versus the dollar, gaining 245 paisa in single day to trade at Rs71.40 and Rs71.50. The rupee further extended its gains against dollar on July 10, recovering 27 paisa for buying and another 30 paisa for selling. As a result, the dollar was seen changing hands at Rs71.18 and Rs71.20.

Further gains were recorded in the rupee value on July 11. The rupee recovered another 115 paisa on the buying counter and 123 paisa on the selling counter. Finally, the dollar closed the week at Rs69.95 and Rs70.05. The rupee had touched historic lows at 73.04 versus dollar in the inter bank market on July 8.

In the open market, the rupee weakened versus the dollar, shedding 170 paisa to trade at Rs 71.50 and Rs 72.00 on the first trading day. By the close of the day, the dollar had almost vanished due to sharp rise in demand, amid speculative trading. Sharp decline in the rupee/dollar parity persisted on the second trading day. The rupee attained historic lows after shedding 190 paisa versus the dollar. The dollar was seen changing hands at Rs 73.40 and Rs 73.70 amid panic dollar buying.

The SBP measures boosted rupee in the open market on the third trading day. The rupee recovered against the dollar, gaining 240 paisa to trade at Rs71 and Rs71.50 on July 9. It extended its overnight firmness verses the dollar on the fourth trading day, when the American dollar was changing hands at Rs70.70 and at Rs71.20 after the rupee had recovered 30 paisa on July 10. On July 11, the rupee posted fresh gains70 paisa, closing the week at Rs 70.00 and Rs 70.50 against the dollar. In the entire week, the rupee managed to recover Rs 3.40 against the dollar in the open market.

Versus the European single common currency, the rupee commenced the week on a dismal note. It shed Rs 3.10 in a single day trading and was seen changing hands at Rs 111.70 and Rs 112.10 on July 7. The downtrend persisted on the second trading day, when the rupee further shed 270 paisa to trade at Rs 114.40 and Rs 114.80 on July 8. The rupee rebounded on the third trading day, when it recovered 380 paisa against euro and traded at Rs 110.60 and Rs 111.00 on July 9. On July 10, the rupee maintained its overnight firmness over the single currency, gaining 20 paisa at Rs 110.40 and Rs 110.80. At the close of the week in review, the euro was trading at Rs 109.30 and Rs 110.30 after it managed to gain 50 paisa more against the European single common currency on July 11, bringing cumulative gains during the week to Rs 2.40.

On the international front, the dollar rose versus the yen in choppy trade on July 7, as US stocks recouped some losses despite renewed fears financial institutions might be forced to write down more mortgage-related assets and raise capital, but eased against the euro. In late New York trade, the euro was up 0.1 percent at $1.5720, erasing losses that had seen it drop earlier to as low as $1.5611. The dollar was up 0.3 percent at 107.18 yen. It was still away from a session peak of 107.75 yen. Sterling was one of the major movers of the day, falling as low as $1.9650 on news British industrial output fell more than expected in May.

On July 8, the dollar rose as the Federal Reserve’s willingness to keep its emergency lending facility open into 2009 for some Wall Street firms calmed fresh credit concerns and encouraged investors to snap up US stocks. The euro fell as low as $1.5636, according to Reuters data and was last trading at $1.5650, down 0.5 percent. The dollar rose 0.3 percent to 107.45 yen, recording its fourth day of gains versus the Japanese currency. Against the Swiss franc, the dollar gained 0.8 percent to 1.0343 francs, while sterling slid 0.3 percent to $1.9686.

On July 9, the dollar fell as news that Iran test-fired nine missiles halted oil’s steep drop and unsettled Wall Street stocks, with investors concerned about the impact of soaring energy prices on the fragile economy. The euro rose 0.4 percent to $1.5734. The dollar dropped 0.6 percent to 106.79 yen and fell 0.4 percent to 1.0290 Swiss francs. Sterling was pulled up against a broadly weaker dollar with the US currency pressured by rebounding oil prices as geo-political tensions re-surfaced. The pound was up 0.4 percent at $1.9775 taking a lead from broader dollar moves as the US currency fell a third of a percent against a basket f six major currencies.

On July 10, the dollar fell against the euro, dragged down by persistent worries over the health of US financial sector, as shares and bonds of the country’s two mortgage finance giants tumbled on capitalisation fears. The euro climbed to a session high of $1.5800 and was last trading at $1.5780, up 0.2 percent on the day. Euro/dollar remained tucked in recent trading ranges in choppy trading conditions. Despite the credit jitters, the dollar firmed against the Japanese yen, helped by gains on Wall Street. The dollar rose 0.3 percent to 107.07 yen while the greenback traded steady at 1.0274 Swiss francs. Sterling last traded at $1.9765, down 0.3 percent on the day.

At the close of the week on July 11, the dollar edged up against the yen in the Tokyo market after a report the US government is considering taking over Fannie Mae and Freddie Mac if their condition worsens, providing some relief to investors and boosting stocks. The euro was little changed at $1.5784 back near the top end of the range between $1.5300 and $1.5910 that it has been trapped in for the past two months. The dollar rose 0.1 percent from US trade to 107.20. The pound was up 0.7 percent at $1.9918, having earlier hit a 1-1/2 week high of $1.9959. The franc was 0.21 percent lower against the dollar at 1.0299 per dollar.