THE US dollar made a swift recovery in the week ending on November 17. The greenback rose from Rs60.20 to Rs 61.60 for spot selling showing a rise of Rs1.40 or more than two per cent in its value within six working days.

Earlier, since the dollar had lost Rs6.90 or more than 10 per cent of its value in the kerb market within two months, coming down from Rs67.10 on September 10 to Rs 60.20 on November 10.

The reasons for the fall of the dollar since September 11 are well known, the most important being an increase in supply after the freezing of bank accounts by the US and introduction of stricter anti-money laundering rules by the central banks of various countries.

The reasons for a swift recovery of the dollar are not equally well known but speculative buying tops the list of the factors that lifted the dollar up this week. State Bank’s Foreign Exchange Advisor Zafar M. Shaikh and President of the Forex Association of Pakistan Malik Muhammad Bostan are on record saying that speculative buying has bolstered the dollar for the time being.

But the two differ on whether banks have connived with the speculators? Whereas Malik Bostan, who acts as the chief spokesman for 400 and odd private money-changers, claims banks have facilitated speculators, Zafar Shaikh, who regulates the inter-bank foreign exchange market, denies it.

But top bankers confirm privately that banks often facilitate speculators by way of making dollar buying on behalf of ghost customers. They say it is the responsibility of the State Bank to investigate if banks were really conniving with speculators. In the past, not only such charges have been investigated, but a few banks have also been found guilty and penalized.

The State Bank officials attribute the recent gain of the greenback also to the fact that before making a recovery the dollar had touched its lowest ebb. “It was enough for the dollar, falling from Rs 67.10 to Rs 60.20 and even below Rs 60 was too much for it,” said a senior SBP official. “When the dollar started selling cheaper in the kerb market than in the inter-bank market earlier this month, people realized that it would now make an immediate recovery.” On November 10, the dollar had become cheaper in the kerb market where it was selling for Rs 60.20 against Rs 61.15 in the inter-bank market. “That was quite unnatural,” said a senior banker. Traditionally the price of the dollar in the kerb market is higher by Rs2 or more than in the inter-bank market, because of the convenience with which people can transact business in the kerb market. The State Bank has also been living with this fact, and has never intervened in the kerb market to bring the rate down. It has also made heavy dollar buying from kerb at an average premium of not less than Rs 2 per dollar in the past two fiscal years. But panic-driven dollar selling after September 11 led to faster erosion in the value of the greenback in the kerb market than in the inter-bank market, thus reducing the gap between the two exchange rates to nil. Whereas the dollar shed 10.2 per cent of its value in the kerb market in two months ending on November 10, it lost only 5.8 per cent in the inter-bank market, coming down from Rs 64.95 to Rs 61.15 for ready selling.

Bankers and money-changers say the fall of the dollar in the kerb market below its level in the inter-bank market leads speculators to buy the hard currency from the kerb market and sell the same into inter-bank market after placing it in their fresh foreign currency deposits. They say this also lures banks into buying greenbacks from the kerb market for their ghost customers only to sell the same in the inter-bank market to earn profit. But they say since the supply of the dollar started drying up, after it fell below a psychologically important mark of Rs 60, it was quite natural for the greenback to make a swift recovery.

So overdue was the correction in the exchange rate in the kerb market that the dollar went up by Rs 2.45 or 4 per cent within two days (November 13 -14). On November 14 alone it recovered Rs1.90 or about 3 per cent as Kabul fell a day earlier to the Northern Alliance sending a signal to currency speculators that the hard days for the dollar should be over. But since speculation had fuelled this recovery more than the real demand and supply, the dollar lost part of its strength again and finally closed at Rs 61.60 at the end of the week.

Future outlook; Both, commercial bankers as well as the State Bank officials say privately, that the dollar may gain more weight in the kerb market in the near future mainly because the anti-dollar sentiment that set in after September 11 seems to be over.

“Movements in exchange rates in the kerb market are driven more by the sentiments rather than by market forces,” remarked a senior SBP official. “Those very people who were out to sell dollars till November 12 are now buying them. It’s only the sentiment, the perception that has changed.” This dollar buying, though fuelled mostly by a pro-dollar sentiment, will naturally set in motion what we call the cycle of self-fulfilling prophecy and then there will be more buying until the sentiment receives a crude reality-check.

Much would depend on the changes taking place on the political front. If the scenario in Afghanistan remains uncertain, or if Pakistan finds itself into a more complex situation than before, then the inflow of dollars may dry up and the local currency may come under attack by the speculators. Whereas the supply of dollars from within the country is concerned it is the small savers that started selling dollars into the kerb market after the greenback tumbled to new lows. The speculators do not keep the dollars at home. They still have their safe havens abroad. Now that the dollar is on the path of recovery there are little chances of the small savers selling greenbacks any longer. Speculators may sell dollars at time but only to buy them back when time is opportune.

Overseas Pakistanis can play a key role in determining the future health of the rupee. If the efforts being made by leading banks bear fruits and they are able to attract more home remittances through the banking system rather than through ‘Hundi’ then the rupee would surely find itself in a comfortable position vis a vis the dollar.

But if the recent surge of the dollar in the kerb market restores the kerb premium of Rs 2 or more per dollar then overseas Pakistanis would not find it feasible to send more money through banks than what they had already been sending. Bankers say that overseas Pakistanis send $7-8 billion back home every year but only $1 billion comes through the banking system and the rest through ‘Hundiwalas.’

The State Bank officials say the quantum and the timing of the inflow of foreign aids would also impact on the health of the rupee. The same is true for the external debts that Pakistan is now looking at. If Islamabad negotiates a large long-term debt with the IMF and the donor agencies, or if it can win more rescheduling of external debts than pro-rupee sentiment would naturally start building up. But if the country cannot get what it is expecting from the international community, then the local currency may remain under pressure, primarily in the inter-bank market, and by consequence, in the kerb market.