The rupee was able to minimise its losses against dollar as a result of corrective measures taken by the State Bank of Pakistan (SBP) during the week ended on May 17, 2008. The feature of the week was narrowing gap between the official and open market rates which would definitely discourage the speculative trade of the US dollar.
In the interbank market, the rupee lost 30 paisa against dollar for buying at 68.60 and five paisa for selling at 68.80. The difference between the official and open market rates was only five paisa. This factor will definitely help in restoring the confidence of small dollar investors and will also discourage 'Hundi' and 'Hawala' systems and speculative buying of the US currency, analysts said.
In the open market, the rupee lost 80 paida versus dollar for buying and selling at 68.65 and 68.85. The local currency also lost Rs 2.45 versus euro for buying and selling at Rs 106.30 and Rs 106.40 as the single European currency is gaining strength in terms of the dollar in the foreign markets.
Analysts were of the view that measures taken by the State Bank of Pakistan (SBP) had proved fruitful in stopping the decline of the rupee against the dollar.
To bring the stability in the money market, a warning was issued by the State Bank that it may impose severe administrative control over the foreign exchange market "if the market fails to discipline itself?"
The central bank governor, Dr Shamshad Akhtar, met bankers and heads of the leading moneychangers, and asked them to keep grip over the currency movements by taking safeguard steps to ward off speculative buying of dollars.
Besides, the Bank asked the moneychangers to stop sending foreign currencies abroad till the normal condition is restored. Market players felt that this factor has worked, as the rupee itself was able to stand at a certain position against the greenback. The debacle in the currency and stock markets caused nerve-racking among both local small and foreign investors. The governor of the SBP expressed concern over high volatility and weakened exchange rate, and said that the recent behaviour of the exchange market "is totally out of line or out of the track". But, she said she was confident that there was no crisis-like situation as several steps had been placed to ease the market position.
According to the SBP weekly data, country's forex reserves fell by nearly 49 million dollars to 12.207 billion dollars.
In the meantime, the ratings agency Standard & Poor's cut Pakistan's sovereign rating on Thursday, citing increasing pressure from expanding budget and trade deficits against a volatile political setting.
The move came as no surprise to analysts, who had long been warning about deteriorating economic fundamentals and policy paralysis in the South Asian economy, or to investors who have driven the rupee down to record lows.
INTER-BANK MARKET: On Monday, the rupee opened for buying at 68.25 and selling at 68.75 following the cautionary steps taken by central bank. The morning session started on a negative note as the rupee opened with a fall of 2.00 or two percent at 68.50 and 69.00 for buying and selling. Later, in the afternoon, it trimmed its erosion, recovered 75 paisa for buying and selling at 67.50 and 68.00.
On Tuesday, the rupee shed 10 paisa in relation to dollar for buying at 68.35 recovered 35 paisa for selling at 68.40. On Wednesday, bearish sentiment was witnessed on the currency market as the rupee gave up its firmness due to heavy demand by the importers, experts said. At official closing, the rupee shed 25 paisa in relation to the dollar for buying at 68.60 and 40 paisa for selling at 68.80. On Thursday, the rupee shed 30 paisa against dollar for buying and selling at 68.90 and 69.10 and the rupee-dollar official parity rates were unchanged the next day.
At the week-end, the rupee was the rupee rose by 30 paisa against the dollar for buying and selling at 68.60 and 68.80, dealers said.
WORLD VALUE FO DOLLAR: "Some people thought the dollar was going to fall off a cliff. And while I think the dollar is going to gain some ground long-term, I think a major dollar rally is still a ways away," said O'Neill.
In the United States, three economic reports came in weaker than forecast, supporting gold's rise. In the first session of the week in Asia, the dollar posted modest gains in as traders braced for a raft of data that may shed new light on the extent of the US economic slowdown, dealers said.
The dollar edged up to 103.13 yen in Tokyo morning trade from 102.82 in New York late Friday. The euro slipped to 1.5440 dollars from 1.5481 but was stable at 159.16 yen. The dollar gained ground as speculators adjusted positions following heavy selling of the US currency at the week-end as traders bet on steady eurozone interest rates and mulled news of a big quarterly loss at US insurance giant AIG. In the second session of the week in Asia, the dollar was steady in subdued trade, with many investors looking to US retail sales figures later in the day to decide if the Federal Reserve is likely to keep interest rates steady in the months ahead.
Traders said more signs of slowing growth beyond US shores could help support the dollar, but doubts about whether the worst of the credit market turmoil is really over would cap the currency's gains.
In the third session of the week in Asia, the dollar steadied on Wednesday, keeping gains made on stronger-than-expected US retail sales data that supported the view that the Federal Reserve won't cut interest rates next month.
The dollar got a boost after data on Tuesday showed that retail sales, excluding the hard-pressed auto sector, rose 0.5 percent in April, more than double the increase that economists had forecast.
The outlook for higher US interest rates later this year has at least for now saved the US dollar from being used to fund carry trades, a fate that has befallen other low-yielding currencies such as the Japanese yen.
Low interest rate currencies, such as the yen, tend to come under heavy selling pressure as investors borrow cheaply in the currency, then sell the proceeds and invest in higher yielding investments in other currencies.
The Federal Reserve's benchmark US interest rate, the federal funds rate, is down to 2.0 percent from the 5.25 percent when the Fed began cutting last September. And federal funds rate is only half that of the European Central Bank's benchmark rate of 4.0 percent, as well as 5.25 percentage points below the Reserve Bank of Australia's rate, and 6.25 percentage points below New Zealand's rate. But it is the outlook for US interest rates relative to other industrialised nations that is important.
"With 325 basis points of easing under its belt, the US dollar has undoubtedly become a low yielding currency," said Kathy Lien, chief currency strategist at DailyFX.com. "However for foreign exchange traders, the direction of interest rate cuts is far more important than the level of interest rates."
In the New York market, the dollar fell as a plunge in US consumer confidence raised concerns about an economic contraction in the second quarter and trimmed the chances the Federal Reserve will raise interest rates this year.
The unexpectedly sharp drop in a consumer sentiment index to a 28-year low in May eclipsed a report showing a rebound in building permits and construction starts for new US homes, which briefly triggered some dollar buying.
"Consumer sentiment data are closely tied to consumer spending levels," said Andrew Busch, global FX strategist at BOM Capital Markets in Chicago.
OPEN MARKET RATES: On May 12, the rupee recovered five paisa against the dollar for buying and selling at 67.85 and 67.95.
The rupee gaining 95 paisa versus euro for buying and selling at Rs 103.85 and Rs 103.95. On May 13, the rupee lost 40 paisa for dollar for buying at 68.25 and 45 paisa for selling at 68.40. The rupee lost 1.25 versus the euro for buying and selling at Rs 105.10 and Rs 105.20.
On May, 14, the rupee slid 10 paisa against dollar for buying and selling at 68.35 and 68.50. The rupee, however, gained 60 paisa against the euro for buying and selling at 104.50 and 104.60. On May 15, the rupee lost 45 paisa in terms of the dollar for buying and selling at 68.80 and 68.95. The rupee, however, shed 30 paisa versus the euro, rising 30 paisa for buying and selling at Rs 105.20 and Rs 105.30, they said. On May 16, the rupee shed 10 paisa against the dollar for buying at 68.90 and it also shed five paisa for buying at 69.00, the rupee also lost 50 paisa versus the euro for buying and selling at Rs 105.70 and Rs 105.80.
On May 17, the rupee shrugged of the weakness, gaining 25 paisa against the dollar for buying at 68.65 and it also rose by 15 paisa for selling at 68.85. The rupee extended its losses in relation to the euro, falling 60 paisa for buying and selling at Rs 106.30 and Rs 106.40.