Divergent trend was seen in the local currency market when the trading resumed after a long weekend on account of Quaid-i-Azam day holiday on December 25, as the rupee moved both ways in relation to the dollar. The local currency displayed firmness this week versus the American dollar and the European single common currency. However, over the past 12 months the rupee has shown a deeper slide versus the euro in contrast to dollar.

In the interbank market, the week commenced on a negative note as the demand for US currency persisted in the local market. The rupee further extended its weakness and shed two paisa against the dollar on December 26, changing hands at Rs60.95 and Rs60.97 compared to previous week close of Rs60.93 and Rs60.95. The rupee moved down further versus the dollar, shedding one paisa on December 27, to trade at Rs60.96 and Rs60.98, amid rising demand by the corporate sector.

The rupee, however, shrugged of the overnight weakness in relation to the dollar on December 28, recovering four paisa and traded at Rs60.92 and Rs60.94 as dollar demand and supply was in balance. The rupee/dollar parity strengthened further due to sufficient dollar inflows on December 29. Hefty inflows of dollars helped the rupee to expand its winning ground against the greenback. The rupee gained four paisa traded at Rs60.88 and Rs60.90.

During the week in review, the rupee in the inter bank market, managed to display its firmness over the dollar by recovering five paisa over the previous week close. On year on year basis, the rupee depreciated by 1.9 per cent against the dollar. The dollar was at Rs59.73 and Rs59.75 in the inter bank market 12 months ago.

In the open market, the rupee displayed strength over the American currency opening the week on a positive note. After closing last week at Rs60.90 and Rs60.98 the rupee gained eight paisa to trade at Rs60.82 and Rs60.90 on the first trading day (December 26) of the week, December 25 being public holiday on account of Qaid-e-Azam birthday.

Sharp recovery was seen in the open market on December 27, as the rupee gained 14 paisa in relation to the dollar, changing hands at Rs.60.68 and Rs.60.75. Supply of dollars remained strong, which encouraged the rupee to make further advances versus the US currency on December 28. As a result, the rupee maintained its surge against the dollar in the open market, picking up ten paisa and traded at Rs.60.58 and Rs.60.65.

On December 29, the rupee further extended its firmness over the American currency and gained five paisa to trade at Rs60.53 and Rs60.62. Throughout the week in review the rupee in the open market managed to display its strength over the dollar. It gained 37 paisa over the previous week. However, the rupee recorded a depreciation of 1.04% over the past 12 months against the dollar, which was at Rs59.90 and Rs59.95, a year earlier.

Meanwhile, when trading resumed on December 26 after remaining suspended for a day on December 25, being Qaid-e-Azam day holiday, the local currency managed to recover four paisa versus the European single common currency, which was quoted at Rs79.36 and Rs.79.46 against previous week close of Rs79.40 and Rs79.50. The rupee further managed to gain 31 paisa versus the euro on December 27, when it traded at Rs79.05 and Rs79.15.

On December 28, the rupee extended its overnight gains in terms of the euro further recovering two paisa on the buying counter and another five paisa on selling counter, changing hands at Rs79.03 and Rs79.10. The rupee further recovered 13 paisa against the euro and traded at Rs78.90 and Rs79.00 on December 29. This week, the rupee recovered 50 paisa against the European single common currency in the local currency market. Over the past 12 months, the rupee lost Rs8.50, showing a depreciation of 10.8 per cent versus the euro. The euro was at Rs70.40 and Rs70.50 a year ago.

On the international front, most financial markets were closed on the week’s opening day on account of Christmas, as a result of which trading in currencies remained thin in many countries. On December 26, however, the dollar climbed to a two-month high against the yen on weak Japanese inflation and spending data while gaining against most other currencies in holiday-thin trading. Many European financial markets, as well as those in Australia, New Zealand and Canada, were closed for the Boxing Day holiday. Lower trading volumes were exacerbating moves, traders said.

The major currency in focus was the yen after lacklustre Japanese economic data failed to change expectations that the Bank of Japan will keep interest rates unchanged next month. Against the yen, the dollar rose to 119.23 yen, the highest since October 25. The dollar then pared its gains to 119.12 yen, an advance of 0.3 per cent on the day, according to Reuters data.

The yen was undermined by data showing Japan's core consumer price index rising 0.2 per cent in November from a year earlier, in line with market expectations, and all-households spending fell 0.7 per cent in November, smaller than the expected decline of 1.3 per cent. The latest Japanese economic reports kept investors thinking the BoJ may not see enough data to justify a rate increase before its two-day policy meeting on January 17-18, traders said.

Another mover was sterling, which traded at $1.9535 as investors booked profits on the currency's recent sharp gains. Technical signals further suggested the currency had been overbought and a retrace was in order, traders said. In other trading, the euro was down 0.3 per cent against the dollar at $1.3095. The dollar was up 0.4 per cent against the Swiss franc at 1.2234 francs. The dollar climbed to its highest level since early April against the Canadian dollar. The greenback traded up 0.3 per cent against its Canadian counterpart at C$1.1604.

Asian currencies were steady in slow trade with the upside capped by the yen's weakness versus the dollar after Japanese consumption and consumer price data failed to dispel doubts about whether the Bank of Japan would raise interest rates in January.

On December 27, the dollar slipped but trimmed losses after a surprisingly robust US housing report suggested the sector was stabilising, easing expectations for interest rate cuts next year. The euro, on the other hand, continued to rack up gains, driven by continued expectations that the European Central Bank will raise interest rates further next year from the current 3.5 per cent.

The euro rose 0.2 per cent against the dollar to $1.3120, but was off session highs at $1.3178.

Against the yen, the dollar fell to a session low of 118.29 yen before rebounding to 118.78 yen, down 0.3 per cent, after Jiji news agency reported that the Bank of Japan is likely to discuss raising rates to 0.5 per cent next month. Jiji, citing no sources, added that the decision could be postponed to February or later in the case of unexpected events in financial markets.

Sterling rose against a broadly softer dollar, with a thin post-Christmas data calendar leaving the market dependent on broader moves in the greenback and euro over the rest of this week. Influence for the dollar was seen coming from US housing data due later in the day, with softer-than-forecast numbers likely to send the US currency further south. It was up a quarter percent on the day at $1.9591.

At the close of the week on December 29, the dollar steadied in Tokyo after paring losses against the euro in the previous session on a raft of data that showed the US economy may be in better shape than earlier thought. The US currency has been unable to shake off market expectations in the past few months that the slowing economy could force the Federal Reserve to start cutting interest rates next year.

Bond and stock markets in Japan were open for a half-day and will resume trading on January 4. Expectations that the ECB will further boost rates next year from the current 3.5 per cent helped the euro to find favour. The euro has risen 11 per cent against the dollar and 12 per cent versus the yen this year, aided by stagnating rates in the United States since mid-year and prospects for only a gradual rise in Japanese rates from the current 0.25 per cent.

In London, the euro stayed on firm ground against the dollar and hit a record peak against the yen for a second day, the last trading day 2006, supported by expectations the European Central Bank will keep raising rates. However some analysts were pointing to downside risks for the single European currency early next year as most of the euro-positive news had already been factored into the market.

Analysts said the ample liquidity supported further euro area monetary tightening, but the data failed to move the euro significantly on its release. The euro was up almost 0.3 per cent at $1.3181 on track to end-2006 with a gain of more than 11 per cent after a 12 per cent fall in 2005. The euro also gained a quarter percent on the day against sterling and climbed 0.3 per cent to a record high 156.79 yen for a second day and up 12 per cent on the year. Traders cited strong buy orders on euro/yen.