Has USD to PKR rate peaked? 

LAHORE: The value of the dollar fell by almost Rs 5 in the early trade on Tuesday, as the greenback settled the day’s trade at Rs 267.89 with a loss of Rs 1.7 in the interbank market. A similar trend was observed in the open market today with the currency dealers asking for Rs 269 per USD, against the previous day’s rate of Rs 275 per USD, leaving many to ponder the reasons behind this sudden drop in the dollar rate.

While the decline in the dollar rate in the open market is commonly assumed to be a result of speculative behavior, with more people willing to sell their dollars than those willing to buy, particularly in light of the ongoing talks between the government and IMF, the reality on the ground was very different. However in order to understand what forces were at play in the open market we need to first see the interbank market and understand specific dynamics that have led to the dollar slipping in value slightly. 

What happened in the interbank market

According to sources familiar with its workings, the drop is attributed mainly to the monthly import limits set by the State Bank of Pakistan (SBP) for each bank for import of non-essential imports. With most banks having exhausted these limits for the month of December, there was very little pressure in the interbank market to make import payments on the last day of the month. With the Interbank market experiencing a temporary decline in demand, coupled with a relatively higher supply of dollars through official channels on the back of the interbank rate going as high as Rs 270 yesterday.

“This extra supply with a temporary drop in demand has led the interbank market  to cool off for a day. Assuming nothing else changes, I expect that with the new month, demand pressure will start building again which could drive up the price of the dollar again,” said one analyst talking on condition of anonymity. According to another analyst, with a limit on buy-sell spread, it also made sense for the banks to offer less to exporters on a day when they didn’t have to sell too many dollars to the importers.

But what about the open market then?

One would assume that a Rs 5 drop in the dollar rate must have been caused by excess supply in the open market with too many people selling their dollar holdings now. Instead, it was observed that currency dealers had almost no dollars to sell on Tuesday. Then what caused the price to drop? 

Some believe that the open market was following the lead of the interbank market, with currency exchange companies hesitant to buy dollars at higher rates in fear of selling at a loss if the rate were to drop again. On the other hand, some currency dealers were trying to make a quick buck by artificially lowering the dollar rate. The hope was that people would start panic selling after seeing the sudden drop in both interbank and open market rates, thus currency dealers were choosing to only buy the currency at these low rates.

That said, analysts believe that it was always expected that after the removal of the artificial cap on dollar rate, the price of the dollar would overshoot, peak and then come down slightly to settle and stabilize at a relatively lower rate, especially after successful completion of the 9th review. It seems that has not happened yet.