December 11, 2006	Monday	Ziqa'ad 19, 1427

LOCAL currency is under tremendous pressure these days. Strong dollar-demand to cover rising imports is exerting downward pressure on the rupee. The rupee has already reached its two year lows.

The IMF and the World Bank are of the opinion that the widening trade gap could result in further devaluation of the rupee versus the American currency in coming months. The ministry of commerce has reportedly revised its trade deficit projections for FY’07 to $12.2 billion against the original target of $9.4 billion keeping in view the rising trend in imports and declining trend in exports during the first quarter of the current fiscal year.

During the week in review, the local currency market commenced trading on a negative note. In the inter-bank market, the rupee touched two-year new lows on the opening day of the week, shedding seven paisa for buying and six paisa for selling. It traded at Rs60.93 and Rs60.94 on December 4, against the previous week close of Rs60.86 and Rs60.88.The dollars' demand by the importers to meet the payments was high, while the dollar was short in supply. On December 5, the rupee managed to recover slightly from its overnight weakness in terms of the dollar on the buying counter but remained unchanged on the selling counter, changing hands at Rs60.92 and Rs60.94.

On December 6, the rupee managed to further recover versus the dollar. It gained five paisa against the dollar for buying and picked up six paisa for selling trading at Rs60.87 and Rs60.88, but then it lost one paisa against the dollar and traded at Rs60.88 and Rs60.89 on December 7. The rupee continued unchanged on December 8, as it remained traded at Rs60.88 and Rs60. 89 on the fifth day of trading. During the week in review, the rupee in the inter-bank managed to recover four paisa on buying and six paisa on selling.

In the open market, the rupee shed three paisa for buying and lost eight paisa on the selling side on December 4, changing hands at Rs60.86 and Rs60.95 on the first day of the week against previous weekend’s Rs60.83 and Rs60.87. High payments for import bills, increased the demand for dollar on December 5, caused further decline in the rupee's value, which shed seven paisa for buying and four paisa for selling and traded at Rs60.93 and Rs60.99 in terms of the dollar on the second day.

The rupee crossed an important barrier of Rs61 in the open market on the third day of the week in review following the persistent rise in demand for dollars. It shed two paisa for buying and dropped by three paisa for selling at Rs60.95 and Rs61.02 on December 6. However, some recovery was seen in the currency market the fourth day of trading, as the rupee gained three paisa while it further shed five paisa for selling against the dollar and traded at Rs60.92 and Rs60.97 on December 7. On December 8, the rupee gained eight paisa for buying and seven paisa for selling to trade at Rs60.84 and Rs60.90. As a result this week, the rupee in the open market lost six paisa for buying and only two paisa for selling.

Versus the European single common currency, the local currency commenced the week on a positive note as it managed to recover 17 paisa and traded at Rs80.70 and Rs80.80 on December 4, against previous week’s Rs80.87 and Rs80.97. But the recovery proved short lived as the rupee lost 15 paisa on the second day of trading, changing hands at Rs80.85 and Rs80.95versus the euro on December 5.

On December 6, the rupee did not show any change versus the euro and traded at its overnight levels Rs80.85 and Rs80.95. The rupee further picked up 10 paisa in relation to the euro on the fourth and traded at Rs80.75 and Rs80.85 on December 7. On the fifth day of trading, the rupee managed to gain 15 paisa versus the euro. It traded at Rs80.60 and Rs80.70 on December 8. Over all, the rupee this week managed to recover ten paisa versus the European single common currency.

In the International financial market, the dollar edged up against the euro on December 4, as investors locked in profits following a decline that has shaved about three per cent off the greenback's value in less than two weeks. Coming into the week, the dollar had tumbled to a 20-month low versus the euro and a 14-year trough against sterling as weak data fanned fears US interest rates could soon fall even as euro zone rates were headed higher. But the dollar's decline was so swift - it broke below $1.30 per euro on November 24 for the first time since April 2005 and last week breached $1.33 - that analysts started calling the sell-off overdone, sparking a round of profit-taking that began in European trade.

However, traders said the overall mood remains dollar bearish. In New York, the euro traded down 0.1 per cent to $1.3322, off an earlier 20-month low of $1.3367. The euro hit a record high above 154.10 yen before falling back to 153.67, down 0.2 per cent.

The dollar lost ground to the Japanese currency on Monday, down 0.1 per cent at 115.31 yen. The Canadian dollar was among the day's best performers, gaining 0.4 per cent to C$1.1402 per US dollar on bids from real money accounts, according to a dealer with a US custody bank. Sterling was flat on the day at $1.9795 but still near a 14-year high above $1.98 touched last week close.

On December 5, the dollar rebounded against the euro and sterling and pared losses versus the yen after a report showing the US service sector grew at its fastest pace since May countered signs of slower growth. The rise in November service sector activity surprised the market, which expected a much weaker reading after a recent spate of soft US data, including a report showing factory output last month contracted for the first time in 3-1/2 years.

The latest data put the brakes on a sharp dollar slide that began in late November and cast doubt on views the Federal Reserve will cut interest rates in early 2007.

The euro had moved back to $1.3324, near the prior session's closing level, after having slipped to $1.3288 after the data. It hit a 20-month high at $1.3367 on December 4.

Sterling was well off a 14-year peak above $1.98, falling 0.3 per cent on the day to $1.9737. The dollar has lost about 3 per cent of its value over the past couple of weeks amid a flurry of soft US data and expectations of higher interest rates in the euro zone and falling interest rates in the United States. The dollar trimmed losses against the yen to 114.80 yen, down nearly half a per cent on the day but above a four-month low at 114.44 yen. The yen was also up 0.4 per cent at 153.01 yen per euro after Bank of Japan policy board member Atsushi Mizuno said it would be wrong to assume the central bank needed to wait until all economic indicators were strong to raise interest rates again. Japanese rates at 0.25 per cent have kept the yen under pressure and facilitated carry trades in which investors borrow cheaply in yen to buy higher-yielding currencies. The yen's exchange rate, along with uncertainty over the strength of the US economy, is another wild card complicating things for currency traders.

On December 6, the dollar rose across the board after a report showed the US private sector created more jobs than expected last month, leading some to conclude the broader labour market remained resilient. That, along with strong US service sector report, helped cap nearly two weeks of sharp euro gains that took the currency to a 20-month peak versus the dollar. But traders said market sentiment toward the dollar remained broadly negative, with investors reluctant to take on bigger bets ahead of the European Central Bank meeting where officials are expected to lift interest rates and address recent currency movements.

Late in New York, the euro was down about 0.3 per cent at $1.3285, while the dollar traded up about 0.35 per cent at 115.22 yen, just below its session peak. So far, most eurozone policymakers have said euro moves above $1.30 are no cause for concern, though French officials have worried about a strong euro's impact on exports. The New Zealand dollar jumped to $0.6860 after the country's central bank kept rates steady but said it could not rule out further tightening. But the Canadian dollar shed 0.6 per cent against its US counterpart after the Bank of Canada kept rates at 4.25 per cent. The market is still bearish on the dollar, because even on profit-taking, the euro is holding up pretty well.

Sterling fell more than half a per cent against the dollar and weakened against the after the UK pre-budget report was overshadowed by weak UK data and strong US data. It, initially rose slightly after Chancellor of the Exchequer said in his pre-budget report that the economy would grow 2.75 per cent in 2006, up from an earlier forecast of 2.0 to 2.5 per cent. He kept his forecast for 2007 growth at 2.75 per cent to 3.25 per cent but raised his estimate for the economy's long-term potential growth to 2.75 per cent.

Sterling edged up after the pre-budget report ended, but quickly reversed gains after the release of strong data on US private sector employment in November. It was trading at $1.9656, down 0.41 per cent on previous day’s US close, but off the week's lows of $1.9618 set after the US data. Sterling is trading two cents below 14-year highs set last weekend. It was down around 0.2 per cent against the euro at one-week lows of 67.61 pence.