HOW is the rupee continuing to hold its strength against the dollar at a time when currencies around the world are not?

The dollar has risen to the highest level in a decade compared to its principal trade partners, and many other countries around the world are eagerly letting their currencies fall in comparison to avail themselves of the cheaper export prices this makes possible.

Know more: SBP intervention keeps dollar below Rs102

The dollar’s recent strength does not come from any underlying economic dynamism. It comes from the prospect of rising interest rates. In response, central banks around the world are cutting rates, from India to Russia to the European Central Bank to many other emerging markets as well, in an effort to further drive down their own currencies and make their products competitive in world markets.

This trend has accelerated throughout 2014, and has only been gaining momentum in the early months of 2015. Yet the Pakistani rupee clings stubbornly to its value of 102 to a dollar.

Some might see this as a sign of economic strength. But all it shows is that the monetary authorities in Pakistan are using their precious foreign exchange reserves, mostly consisting of borrowed money, to shore up the value of the rupee.

Recent reports from the currency markets suggest that the authorities may be resorting to increasingly aggressive moves to keep the rupee steady around 102. Why would they do this?

One simple answer is ego. For many decades now, the assumption has reigned in our policy thinking that a strong rupee is desirable because it makes imports cheaper.

That may be so, if the consumption of imported goods was the only objective that our economic policy was supposed to serve. But in reality, it is worth asking what costs come with this stubborn insistence to support the rupee at higher levels.

Exports suffer, as seen in our trade balance, and more sustainable sources of earning foreign exchange dwindle, making the economy more dependent on borrowed resources. Thus, the sale of automobiles and retail fuels are shooting up but exports are declining month after month.

Is this really a desirable state of affairs? It is worth reminding the monetary authorities in Pakistan, and there is some debate about who they really are these days, that the benefits of a strong rupee may not necessarily outweigh the costs.

As the dollar continues its unnatural climb, perhaps it would be better to let the rupee find its own moorings.

Published in Dawn March 7th , 2015

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