December 18, 2006	Monday	Ziqa'ad 26, 1427

DURING the week in review, smooth dollar-supply was an aiding factor behind the rupee's firmness. The rupee also managed to extend its ground versus the dollar following the statement that the State Bank of Pakistan has no plan to depreciate rupee on the advice of donor agencies. However, the rupee continued to be under pressure.

The rupee appreciated by six paisa against the dollar in the inter-bank market on the opening day of the week to trade at Rs60.90 and Rs60.92 against previous weekend’s Rs60.96 and Rs60.98. Improved supply of dollars and remark by the SBP boosted the rupee. The overnight firmness in rupee/dollar parity prevailed on the second trading day. However, the rupee showed marginal gain on December 12, as it traded at Rs60.89 and Rs60.91, up one paisa on dollar.

On December 13, the rupee continued its upward trend gaining two paisa for buying and picking up further three paisa for selling. It traded at Rs60.87 and Rs60.88 on the third trading day. The firmness in the rupee/dollar parity persisted on the fourth day of the week in review. The rupee, however, depicted a mixed trend as it recovered two paisa on the buying counter but shed two paisa on the selling counter to trade at Rs60.85 and Rs60.90 against the dollar on December 14.

Rising trend persisted on the fifth day of trading as the rupee picked up two paisa for buying and another three paisa for selling, changing hands at Rs60.83 and Rs60.87, as improved inflows of remittances supported the rupee on December 15. During the week in review, the rupee in the inter-bank market managed to recover 13 paisa on the buying counter and 11 paisa on the selling counter.

In the open market, the rupee/dollar parity continued its downturn on the opening day of the week. It again touched the low mark of 61 on December 11, as the rupee gave up weekend firmness and shed 15 paisa on the buying counter and 17 paisa on the selling counter changing hands at Rs60.98 and Rs61.05 in relation to the dollar as against previous weekend’s Rs60.83 and Rs60.88. Increased demand by the corporate sector, pushed the rupee value down.

Higher demand for dollars in the open market prevailed on the second day, which forced the rupee to further extend its weakness in terms of the US currency breaching Rs61 barrier on the buying counter. It lost 10 paisa versus the dollar and traded at Rs61.08 and Rs61.15 on December 12. However, it managed to gain three paisa for buying and also picked up five paisa for selling on December 13, changing hands at Rs61.05 and Rs61.10 against the dollar.

On December 14, the rupee showed mixed trend versus the dollar, picking up two paisa for buying while remaining unchanged at the selling counter to trade at Rs61.03 and Rs61.10. The rupee, however, extended its overnight firmness versus the dollar making fresh gain of four paisa to trade at Rs60.99 and Rs61.05 for a dollar on December 15. During the week in review, the rupee in the open market lost 17 paisa versus the dollar.

Versus the European single common currency, the rupee showed its strength on the first trading day of the week in review as it recovered 25 paisa and traded at Rs79.75 and Rs79.85 on December 11, against Rs80.00 and Rs80.10 in the previous week. The rupee, however, gave up its overnight firmness against the euro on the second trading day, sharply shedding 75 paisa to change hands at Rs80.50 and Rs80.60 on December 12.

On the following day, the rupee further shed 15 paisa against the euro to trade at Rs80.65 and Rs80.75 on December 13. The rupee, however, managed to recover 47 paisa on December 14, when it traded at Rs80.18 and Rs80.28 versus the European single common currency. On December 15, the rupee retained its firmness, showing 38 paisa rise versus the euro, which was seen changing hands at Rs79.80 and Rs79.90. This week, the rupee managed to recover 20 paisa against the euro.

In the international financial markets, the dollar retreated against European currencies and trimmed gains versus the yen on the week’s opening day, after former Federal Reserve Chairman Alan Greenspan warned investors to expect "a few years of dollar weakness." Currency investors also looked ahead to the outcome of this week’s Federal Open Market Committee meeting. The FOMC is widely expected to leave the federal funds rate unchanged at 5.25 percent, and given the note of caution on inflation recently from a number of Fed officials, markets expect the post-meeting statement to again echo this concern.

As markets awaited the Fed meeting, remarks from Greenspan, who addressed a business conference in Tel Aviv via video-link, accelerated the dollar's slide against the euro. Investors bought euros after his remarks, unwinding short positions built at previous week close, when new US jobs data proved robust enough to trigger a dollar rally. The euro hit a session high of $1.3263 on December 11, after Greenspan's comments, and was up 0.3 percent at $1.3235, having broken a three-day losing streak against the dollar.

The dollar pared gains versus the yen, which had come under pressure across the board earlier in the day thanks to data last week that showed soft patches in the Japanese economy and a wire report suggesting the Bank of Japan will delay any rate hikes until early next year. It was up 0.5 percent against the yen at 116.97 yen, from a nearly three-week high around 117.26 yen. The yen hit record lows against the euro, which traded up 0.8 percent at 154.83 yen, having hit a record high of 154.88 yen on the EBS.

The broad-based weakness in the economic numbers coming out of Japan are a risk to the BoJ hiking next week but the move back higher in USD/JPY since last week end from just below 115.00 to above 117.00 seems to be taking a lot of that into account. Sterling was up 0.2 per cent at $1.9568, while against the Canadian dollar the US dollar was down 0.1 per cent at C$1.1476, and against the Swiss franc the dollar slipped 0.2 per cent to 1.2026 francs.

On December 12, the dollar declined after the Federal Reserve kept interest rates steady, as expected, but struck a slightly more dovish tone in its statement by noting the risks from a cooling housing market. The central bank's Federal Open Market Committee kept the federal funds rate steady at 5.25 per cent for a fourth straight meeting. In its statement, generally viewed by the market as balanced, the Federal Reserve Open Market Committee warned about inflation. But it fuelled a dollar sell-off by adding "substantial" to its description of the US housing market slowdown, traders said.

The euro rose against the dollar to as high as $1.3293 after the Fed statement before trading back down at $1.3279, still up 0.3 percent on the day. The dollar was down 0.2 percent against the yen at 116.78 yen. The euro hit a record high against the yen at 155.30 yen after the Fed's decision, according to electronic trading platform EBS, and last traded at 155.09, up 0.2 per cent from December 11. The dollar fell 0.3 per cent against the Swiss franc to 1.1996 francs. Sterling rose 0.7 percent to $1.9707. Some analysts said the knee-jerk selling of the dollar was sparked by market participants who had bought dollars going into the Fed decision in anticipation of a statement that would focus more on inflation risks.

On December 13, the dollar firmed after US consumer spending in November exceeded expectations, but sentiment on the currency remained predominantly bearish given expectations of a slowdown in 2007. A stronger-than-expected US retail sales report in November, showing the largest rise in four months, spurred hefty dollar bids early in the session, although afternoon buying of the greenback was more technically driven.

The euro was down 0.5 per cent against the dollar at $1.3214, having hit a session low of $1.3196. But this was well off the $1.3129 trough established on the opening day of the week in the wake of last week's strong US employment data for November. Against the yen, the dollar rose to a three-week high at 117.65 yen, according to electronic trading platform EBS. The pair last traded at 117.51, up 0.6 per cent. Sterling was down 0.3 per cent at $1.9660, well off a session high at $1.9729 hit after robust UK employment data.

The worst performer of the day against the dollar was the Norwegian crown, which shed 0.7 percent of its value a day after the Norges Bank raised interest rates but suggested subsequent increases would be only gradual. The crown was last quoted at 6.1697 to the dollar. The dollar came under broad-based pressure when the Federal Reserve left interest rates steady at 5.25 per cent. Yields on benchmark 10-year notes, which rose to 4.57 percent from 4.49 percent after the strong retail sales data, also lifted the dollar, some analysts said.

On December 14, the dollar gained as stronger-than-expected US data strengthened the view that the Federal Reserve may not have to reduce interest rates just yet to stimulate the economy. Meanwhile, the sell-off in fed funds futures gained momentum amid signs of a stronger US economy. Chances of a Fed rate cut by the end of the first quarter next year dropped to 10 per cent, the lowest in a month, from 20 per cent. The futures market still favoured a rate cut by the end of second quarter, but the easing was no longer being fully priced in.

The dollar had come under almost unabated pressure over the last month as investors bought into the notion that the US economy was slowing enough to warrant a cut in official interest rates by the Fed in early 2007. It further gained support from rising US bond yields. US Treasury prices fell, sending yields to three-week highs around 4.59 per cent on the 10-year note, ahead of weekend’s reading on consumer inflation.