Exchange Rate

Exchange Rate and its impact on PakistanContents: Exchange rate Background Foreign reserves

Fluctuations in exchange rate

Depreciation and appreciation

Types of exchange rate

Demand and supply in money market

Foreign exchange market

Market equilibrium

Exchange rate impact

Pakistans economy

Currency rates in pakistan

Volatilty of rate

Currency rate impact on Pakistan

Exchange RateIn finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. It is the value of a foreign nations currency in terms of the home nations currency. For example an exchange rate of 91 Japanese yen (JPY, ) to the United States dollar (USD, $) means that JPY 91 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 3.2 trillion USD worth of currency changes hands every day. In a slightly different perspective, the exchange rate is a price. If the exchange rate can freely move, the exchange rate may turn out to be the fastest moving price in the economy, bringing together all the foreign goods with it.

The currency listed on the left is called the reference (or base) currency while the one listed to the right is the quote (or term) currency. There is a market convention that determines which is the base currency and which is the term currency. In order to determine which the base currency is where both currencies are not listed (i.e. both are "other"), market convention is to use the base currency which gives an exchange rate greater than 1.000. This avoids rounding issues and exchange rates being quoted to more than 4 decimal places. There are some exceptions to this rule e.g. the Japanese often quote their currency as the base to other currencies.Quotes using a country's home currency as the price currency (e.g., EUR 0.735342 = USD 1.00 in the Euro zone) are known as direct quotation or price quotation (from that country's perspective) and are used by most countries.

Quotes using a country's home currency as the unit currency (e.g., EUR 1.00 = USD 1.35991 in the Euro zone) are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and the Euro zone.

direct quotation: 1 foreign currency unit = x home currency units

indirect quotation: 1 home currency unit = x foreign currency units

Note that, using direct quotation, if the home currency is strengthening (i.e., appreciating, or becoming more valuable) then the exchange rate number decreases. Conversely if the foreign currency is strengthening, the exchange rate number increases and the home currency is depreciating.

BackgroundThe exchange rate history of the nineteenth century highlights the importance of the gold standard in that era. From 1876 to 1913, the exchange rate system was dependent on the respective currencys comparative convertibility to an ounce of gold. However, this method of determination of the exchange rate had to be reassessed when the gold standard was suspended during World War I.

The suspension of the gold standard in 1914 was followed by a collapse of the exchange rate market. In the early 1920s, some countries tried to revive the gold standard to get the old exchange system back into practice. However, the Great Depression hit the United States in 1929. The devastating effects of this were felt by most of the developed world. As a result, all plans on the revision of the gold standard were abandoned.

Close to the end of World War II, the Bretton Woods Agreement was signed. Since the impact of the Great Depression was still fresh in the minds of the policymakers, they wanted to shun all possibilities of a similar fiasco. The Bretton Woods Agreement founded a system of fixed exchange rates in which the currencies of all countries were pegged to the US dollar, which in turn was based on the gold standard.The Bretton Woods Agreement was in effect till 1971. By 1970, the existing exchange rate system was already under threat. The Nixon-led US government suspended the convertibility of the national currency into gold. The supply of the US dollar had exceeded its demand. In 1971, the Smithsonian Agreement was signed. For the first time in exchange rate history, the market forces of supply and demand began to determine the exchange rate.

The Smithsonian Agreement did not last very long. By 1973, the extensively traded currencies were permitted to fluctuate. In a floating currency system, a currencys value is allowed to vary in keeping with the conditions of the foreign exchange market.

The advantage of a floating exchange rate system is that it is self attuned. A floating currency system allows greater liquidity and central bank control, but can be subject to attacks by speculators, or sudden panic-driven moves by investors that lead to currency crises and recessions.Foreign ReservesHoldings of foreign currency held by a government. A substantial foreign reserve of consistently stable currencies, such as a reserve currency like the dollar or the Euro, can dampen the effect of inflation or of a currency crisis. Also called currency reserve, forex reserve.

Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the Euro, the UK pound, and the Japanese yen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions.

PurposeIn a flexible exchange rate system, official international reserve assets allow a central bank to purchase the domestic currency, which is considered a liability for the central bank (since it prints the money or fiat currency as IOUs). This action can stabilize the value of the domestic currency.

Central banks throughout the world have sometimes cooperated in buying and selling official international reserves to attempt to influence exchange rates.

Changes in reservesThe quantity of foreign exchange reserves can change as a central bank implements monetary policy. A central bank that implements a fixed exchange rate policy may face a situation where supply and demand would tend to push the value of the currency lower or higher (an increase in demand for the currency would tend to push its value higher, and a decrease lower). In a flexible exchange rate regime, these operations occur automatically, with the central bank clearing any excess demand or supply by purchasing or selling the foreign currency. Mixed exchange rate regimes ('dirty floats', target bands or similar variations) may require the use of foreign exchange operations (sterilized or unsterilized) to maintain the targeted exchange rate within the prescribed limits (China has been repeatedly accused of doing this by the USA).

To maintain the same exchange rate if there is increased demand, the central bank can issue more of the domestic currency and purchase the foreign currency, which will increase the sum of foreign reserves. In this case, the currency's value is being held down; since (if there is no sterilization) the domestic money supply is increasing (money is being 'printed'), this may provoke domestic inflation (the value of the domestic currency falls relative to the value of goods and services).

Costs, benefits, and criticismsLarge reserves of foreign currency allow a government to manipulate exchange rates - usually to stabilize the foreign exchange rates to provide a more favorable economic environment. In theory the manipulation of foreign currency exchange rates can provide the stability that a gold standard provides, but in practice this has not been the case. Also, the greater a country's foreign reserves, the better position it is in to defend itself from speculative attacks on the domestic currency.

There are costs in maintaining large currency reserves. Fluctuations in exchange markets result in gains and losses in the purchasing power of reserves. Even in the absence of a currency crisis, fluctuations can result in huge losses. For example, China holds huge U.S. dollar-denominated assets, but the U.S. dollar has been weakening on the exchange markets, resulting in a relative loss of wealth. In addition to fluctuations in exchange rates, the purchasing power of fiat money decreases constantly due to devaluation through inflation. Therefore, a central bank must continually increase the amount of its reserves to maintain the same power to manipulate exchange rates. Reserves of foreign currency provide a small return in interest. However, this may be less than the reduction in purchasing power of that currency over the same period of time due to inflation, effectively resulting in a negative return known as the "quasi-fiscal cost". In addition, large currency reserves could have been invested in higher yielding assets.

The following is a list of the ten largest countries by foreign exchange reserves:

RankCountryBillion USD (end of month)

1$ 2400 (Dec 2009)

2Japan$ 1019 (Jun 2009)

$ 716 (Oct 2009)

3Russia$ 441 (Jan 2010)

4Republic of China (Taiwan)$ 348.2 (Dec 2009)

5India$ 277.0 (Mar 26, 2010)

6South Korea$ 270.9 (Nov 2009)

7Brazil$ 245.000 (Mar 2010)

8Hong Kong$ 240 (Nov 2009)

9Germany$ 184 (Sep 2009)

10Singapore$ 182 (Sep 2009)

Notes

1. China updates its information quarterly.

2. Russia and India update their information weekly and monthly.

3. Brazil updates its information daily.

Excess reservesForeign exchange reserves are important indicators of ability to repay foreign debt and for currency defense, and are used to determine credit ratings of nations, however, other government funds that are counted as liquid assets that can be applied to liabilities in times of crisis include stabilization funds, otherwise known as sovereign wealth funds. If those were included, Norway and Persian Gulf States would rank higher on these lists, and UAE $1.3 trillion Abu Dhabi Investment Authority would be second after China. Singapore also has significant government funds including Temasek Holdings and GIC. India is also planning to create its own investment firm from its foreign exchange reserves.

Fluctuations in Exchange RateA market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency).

Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the country's level of business activity, gross domestic product (GDP), and employment levels. The more people there are unemployed, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions.

The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a country's interest rates, the greater the demand for that currency. It has been argued that currency speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit).

Depreciation and AppreciationIn economics, the terms currency appreciation and currency depreciation describe the movements of the exchange rate induced by market fluctuations. Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system. It is most often used for the unofficial increase of the exchange rate due to market forces, though sometimes it appears interchangeably with devaluation. Its opposite is called appreciation.

The depreciation of a country's currency refers to a decrease in the value of that country's currency. For instance, if the Canadian dollar depreciates relative to the Euro, the exchange rate (the Canadian dollar price of euros) rises - it takes more Canadian dollars to purchase 1 Euro (1 EUR=1.5CAD 1 EUR=1.7CAD).

The appreciation of a country's currency refers to an increase in the value of that country's currency. Continuing with the CAD/EUR example, if the Canadian dollar appreciates relative to the Euro, the exchange rate falls - it takes fewer Canadian dollars to purchase 1 Euro (1 EUR=1.5CAD 1 EUR=1.4CAD).

For example, if the exchange rate between the U.S. dollar and the Euro is expressed in dollars per Euro (e.g., 1.20 dollars per Euro), an increase in the exchange rate (e.g., to 1.25 dollars per Euro) means that the dollar depreciates with respect to the Euro and the Euro appreciates with respect to the dollar. In other words, the dollar becomes less valuable and the Euro becomes more valuable. The same exchange rate can be expressed in euros per dollar (e.g., 0.83 euros per dollar). In this case, an increase in the exchange rate (e.g., to 0.9 euros per dollar) means that the dollar appreciates with respect to the Euro and the Euro depreciates with respect to the dollar.Ways to expressExchange rate prices are expressed in various ways:Spot Exchange Rate - the spot rate is the actual exchange rate for a currency at current market prices. This is determined by the FOREX market on a minute-by-minute basis on the basis of the flow of supply and demand for any one particular currency. Forward Exchange Rate - a forward rate involves the delivery of currency at some time in the future at an agreed rate. Companies wanting to reduce the risk of exchange rate uncertainty by buying their currency forward on the market often use this. Bi-lateral Exchange Rate - this is simply the rate at which one currency can be traded against another. Examples include:

$/DM, Sterling/US Dollar, $/YEN or Sterling/Euro Effective Exchange Rate Index (EER) - the EER is a weighted index of sterling's value against a basket of international currencies the weights used are determined by the proportion of trade between the UK and each country Real Exchange Rate - this measure is the ratio of domestic price indices between two countries. A rise in the real exchange rate implies a worsening of international competitiveness for a country. Exchange rate systemsSince an exchange operates in different types of exchange rate systems, it is fundamental to understand what these are. Here is a description of the different types of exchange rate systems.

Floating exchange rateA floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency.

. As floating exchange rates automatically adjust, they enable a country to dampen the impact of shocks and foreign business cycles, and to preempt the possibility of having a balance of payments crisis. However, in certain situations, fixed exchange rates may be preferable for their greater stability and certainty. This may not necessarily be true, considering the results of countries that attempt to keep the prices of their currency "strong" or "high" relative to others, such as the UK or the Southeast Asia countries before the Asian currency crisis.

In cases of extreme appreciation or depreciation, a central bank will normally intervene to stabilize the currency. Thus, the exchange rate regimes of floating currencies may more technically be known as a managed float. A central bank might, for instance, allow a currency price to float freely between an upper and lower bound, a price "ceiling" and "floor". Management by the central bank may take the form of buying or selling large lots in order to provide price support or resistance, or, in the case of some national currencies, there may be legal penalties for trading outside these bounds.

Fixed exchange rate

A fixed exchange rate is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.

A fixed exchange rate is usually used to stabilize the value of a currency, against the currency it is pegged to. This makes trade and investments between the two countries easier and more predictable, and is especially useful for small economies where external trade forms a large part of their GDP.

It can also be used as a means to control inflation. However, as the reference value rises and falls, so does the currency pegged to it. In addition, according to the Mundel-Fleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve.

Semi fixed rate is the exchange rate is given a specific targetThe currency can move between permitted bands of fluctuation on a day-to-day basisExchange rate becomes an target of economic policy-making (interest rates are set to meet the exchange rate target).Fully fixed rate is when government makes a commitment to a fixed exchange rate. The exchange rate is pegged. There are no fluctuations from the central rate. System achieves exchange rate stability but perhaps at the expense of domestic stability. A country can automatically improve its competitiveness by reducing its costs below that of other countries knowing that the exchange rate will remain stable

Pegged exchange rate An exchange rate for a currency in which the government has decided to link the value to another currency or to some valuable commodity like gold. For example, under the Bretton Woods System, most world currencies pegged themselves to the U.S. dollar, which in turn pegged itself to gold. A government may peg its currency by holding reserves of the peg in the central bank. For example, if a country pegs its currency to the British pound, it must hold enough pounds in reserves to account for all of its currency in circulation. Importantly, pegged exchange rates do not change according to market conditions.Deficit financingIn government, the practice of spending more money than is received as revenue, the difference being made up by borrowing or minting new funds. The term usually refers to a conscious attempt to stimulate the economy by lowering tax rates or increasing government expenditures. Critics of deficit financing regularly denounce it as an example of shortsighted government policy. Advocates argue that it can be used successfully in response to a recession or depression, proposing that the ideal of an annually balanced budget should give way to that of a budget balanced over the span of a business cycle.Deficit financing stimulates the economy for a time but eventually can become a drag on the economy by pushing up interest rates.Demand and supply in money market

The foreign exchange (or Forex) market, just like every other market in the world, is driven by supply and demand. In fact, understanding the concept of supply and demand is so important in the Forex market.

Supply is the measure of how much of a particular commodity is available at any one time. The value of a commodity--a currency in this case--is directly linked to its supply. As the supply of a currency increases, the currency becomes less valuable. Conversely, as the supply of a currency decreases, the currency becomes more valuable.

On the other side of the economic equation, we find demand. Demand is the measure of how much of a particular commodity people want at any one time. Demand for a currency has the opposite effect on the value of a currency than does supply. As the demand for a currency increases, the currency becomes more valuable. Conversely, as the demand for a currency decreases, the currency becomes less valuable.

1. The supply of money goes up.

2. The supply of goods goes down.

3. Demand for money goes down.

4. Demand for goods goes up.

Demand and Supply of Foreign Exchange influences the determination of exchange rates and vice versa. The demand for foreign exchange is inversely proportional to the rise of exchange rate. As the exchange rate goes up the demand for foreign exchange declines. The quantity of foreign exchange demanded falls. The supply of foreign exchange shifts depending on demand and not on the exchange rate. If the supply aspect of transaction is plotted on a graph it will be vertical since the supply of foreign currency deposits available at any time is fixed.

If the supply of a countrys currency increases the value of the currency decreases in relation to other currencies and more money is required to buy the foreign exchanges

Foreign Exchange Market The transaction of a currency takes place in the foreign exchange market. The supply of a currency depends on the ups and downs of the market. In the market large financial institutions and banks trade with money.Factors Affecting Demand and Supply of Foreign Exchange

The supply and demand of foreign exchange depends on lots of factors. They are: Economic Factors that include economic policies formulated by central Banks and government agencies, economic reports, conditions and other economic indicators. Political conditions within and around the country also affect the currency market. Regional, central and international politics cast a profound effect on the currency market. The Market Psychology and the perception of the traders and buyers also affect the currency market in various ways. All these factors affect the currency market and in turn the supply and demand of foreign exchange falters.Equilibrium in the Foreign Exchange Market Whatever the exchange rate may be the aim of world economy is to maintain equilibrium. The foreign exchange market is considered to be in equilibrium when the deposits of all the currencies provide equal rate of return that was expected. The Basic Equilibrium condition depends on interest rate parity. The interest rate parity condition is achieved when the anticipated returns on deposits of any two currencies are same when evaluated in the same currency. This essentially means that the assets are valued as equals. The potential foreign currency holders perceive all of them as equally desirable assets

Exchange rate impactIn the current economy, the dollar is relatively strong compared to other currencies. This makes imports cheap, which reduces inflation. This lowers the cost of living, allowing you to buy more -- or save more, thus enhancing your personal finances.

Unfortunately, a strong dollar also means that U.S. companies can export less since their products cost more relative to foreign products. Over time, this slows economic growth. It also causes companies to source jobs overseas, where foreign workers cost less since they are paid in relatively weaker currencies.

On the other hand, if the dollar declines, this erodes the value of your personal finances. That is because import prices will start to rise, causing inflation that will lower the value of your cash holdings. On the other hand, a weak dollar could help exports, which would strengthen the economy and bring jobs back to the U.S. in the long run. The relationship between interest rates, and other domestic monetary policies, and currency exchange rates is complex, but at the core it is all about supply and demand. Interest rates influence the return or yield on bonds. Because, for example, U.S. Treasury bonds can only be bought in U.S. dollars, a high interest rate in the U.S. will create demand for dollars in which to purchase those bonds. A low interest rate, relative to other major economies, will reduce demand for dollars, as investors move toward higher yielding investments. At least, this is true in normal periods of economic expansion. This has a direct effect on the consumer price index. For example, an appreciation of the exchange rate usually reduces the sterling price of imported consumer goods and durables, raw materials and capital goods. The effect of a changing currency on the prices of imported products will vary by type of import and also the price elasticity of demand which is influenced by the extent of competition within individual markets. Inflation rate is often considered as a determinant of the exchange rate as well. A high inflation should be accompanied by depreciation. The more so if other countries enjoy lower inflation rates, since it should be the difference between domestic and foreign inflation rates to determine the direction and the scale of exchange rate movements.

Some economists believe that the exchange rate influences the power of employees to bargain for increases in real wages. When the exchange rate is high, there is pressure on businesses to control their costs of production in order to remain competitive this may lead to downward pressure on wage inflation. Balance of Payments

The balance of payments can highlight pressures for devaluation or revaluation, reflected in large and systematic trend of foreign currency reserves at the central bank. In particular, large inflows, due for instance to a rise in the world price of main export items, tend to raise the exchange rate. Conversely, a collapse in the trust of government to manage the economic conditions might provoke a flight of capital, the exhaustion of foreign currency reserves and force devaluation / depreciation.Best Exchange RateThe best currency for trading in the forex market is determined by technical analysis. Technical analysis is the process of measuring the value of a currency by monitoring historical price and volume trends. It also helps to establish the future price movements of various currencies and financial instruments.

An investor finds the best exchange rates as follows:

Plan with care before investing in forex and by setting up potential entry and exit points.

Base the entry and exits strategies on support and resistance levels of the currency in forex.

Penetrate the market when minor corrections occur in a currencys trend. These corrections or retracements may be in the form of a pullback in an uptrend or vice versa.

The global foreign exchange market The US dollar as the leading currency In the international foreign exchange market, the US dollar is the dominating currency, the euro, newly established in 1999, coming in second place. Of the total transactions in the international currency markets, 89 percent have the US dollar on one side of the transaction, 37 percent the euro. The yen and the sterling follow with 20 respectively 17 percent. The daily average turnover on the foreign exchange market amounts to US$ 1.9 trillion (April 2004). This figure is adjusted for double counting; the gross turnover is US$ 2.7 trillion. Spot market transactions account for US$ 620 billion, outright forwards for US$ 208 billion, foreign exchange swaps for US$ 944 billion. The average daily turnover in the over-the-counter derivatives market is US$ 2.4 trillion. The by far most traded currency pair in 2004 was the dollar/euro amounting to 28 percent of global turnover; the dollar /yen accounted for 17 percent and the dollar/sterling for 14 percent (all data: Bank for International Settlements, March 2005).

Pakistan as an under developed countryPakistan, an impoverished and underdeveloped country, has suffered from decades of internal political disputes and low levels of foreign investment. Between 2001-07, however, poverty levels decreased by 10%, as Islamabad steadily raised development spending. Between 2004-07, GDP growth in the 5-8% range was spurred by gains in the industrial and service sectors - despite severe electricity shortfalls - but growth slowed in 2008-09 and unemployment rose. Inflation remains the top concern among the public, jumping from 7.7% in 2007 to 20.8% in 2008, and 14.2% in 2009.In addition, the Pakistani rupee has depreciated since 2007 as a result of political and economic instability. The government agreed to an International Monetary Fund Standby Arrangement in November 2008 in response to a balance of payments crisis, but during 2009 its current account strengthened and foreign exchange reserves stabilized - largely because of lower oil prices and record remittances from workers abroad. Textiles account for most of Pakistan's export earnings, but Pakistan's failure to expand a viable export base for other manufactures have left the country vulnerable to shifts in world demand. Other long term challenges include expanding investment in education, healthcare, and electricity production, and reducing dependence on foreign donors.

GDP( official exchange rate):

$168.5 billion (2009 est.)

Reserves of foreign exchange and gold:

$15.68 billion (31 December 2009 est.)

country comparison to the world: 46 $8.903 billion (31 December 2008 est.)

Exchange rate:

Pakistani rupees (PKR) per US dollar - 81.41 (2009), 70.64 (2008), 60.6295 (2007), 60.35 (2006), 59.515 (2005)The State Bank of Pakistan (SBP), the central bank, controls the money supply and credit, supervises the operations of banks, administers the country's international reserves, and acts as banker to the federal and provincial governments. The government of Pakistan has followed a liberal monetary policy in order to provide cheap credit to the industrial sector. The demand for credit, however, has not come forth from the private sector. Although domestic credit expansion was higher due to large borrowing by the government sector, conversion of non-resident foreign currency accounts into rupees, and an increase in liquid reserves, actual growth in money supply has remained stagnant due to low credit demand from the private sector. The government and the SBP are attempting structural reforms in an effort to move toward more indirect, market-based methods of monetary control along with greater autonomy for the SBP. The central bank's autonomy was considerably strengthened with the passage of new banking laws in the State Bank Act in May 1997. There are 3 stock exchanges in Pakistan: Karachi, Lahore, and Islamabad. Lahore and Islamabad stock exchanges are substantially smaller than Karachi.

Karachi Stock ExchangeThe Karachi Stock Exchange or KSE is a stock exchange located in Karachi, Sindh, Pakistan. Founded in 1947, it is Pakistan's largest and oldest stock exchange, with many Pakistani as well as overseas listings. . It was declared the Best Performing Stock Market of the World for the year 2002. As of Dec 8, 2009, 654 companies were listed with a market capitalization of Rs. 2.561 trillion (US$ 30.5 billion) having listed capital of Rs. 705.873 billion (US$ 10.615 billion). The KSE 100TM Index closed at 10246 on April 01, 2010.The Karachi stock exchange has undergone a considerable deal of downturn partly due to global financial crisis and partly on account of domestic troubles. It remained suspended in excess of 4 months and resumed normal trading only on December 15, 2008. The KSE 100 Index and KSE 30 Index after hitting the low around mid January has now rebounced and recovered 20-25% till March 12 2009.Currency rates in Pakistani rupeesHere is chart showing latest exchange rate in PakistanCurrencySymbolBuying Selling Charts

Australian DollarAUD77.978.9

Bahrain DinarBHD223.1225

Canadian DollarCAD82.983.9

China YuanCNY12.213.3

Danish KroneDKK1515.5

EuroEUR113.2114.3

Hong Kong DollarHKD10.711

Indian RupeeINR1.751.85

Japanese YenJPY0.90.91

Kuwaiti DinarKWD288291

Malaysian RinggitMYR24.225.7

NewZealand $NZD57.558.58

Norwegians KroneNOK1414.2

Omani RiyalOMR218.3220.85

Qatari RiyalQAR22.923

Saudi RiyalSAR22.2322.45

Singapore DollarSGD59.660.6

Swedish KoronaSEK11.511.7

Swiss FrancCHF78.379

Thai BhatTHB2.42.6

U.A.E DirhamAED22.7322.95

UK Pound SterlingGBP128129.2

US DollarUSD8484.3

Currency rate volatilityThe impact of exchange rate volatility on the volume of international trade has been

studied intensively since the late 1970s when the exchange rate moved from fixed to

flexible exchange rate, means facing a volatile real exchange rate. The theory says that

higher exchange rate volatility will reduce trade by creating uncertainty about future

profit from export trade. By using the forward markets and by managing the timing of

payments and receipts the firm can reduce the uncertainties in the short run. In the long

run, exchange rate volatility may also affect trade indirectly by influencing firms

investment decision. However, the commercial investors have limited possibilities of

trading claims to future operational cash flows. Thus they are forced to shift away from

risky markets. According to these arguments, traders are risk averse, and hedging is

expensive or impossible; therefore, exchange rate volatility will reduce risk adjusted

profit from foreign trade.Pakistans exchange ratePakistan follows the flexible exchange rate system since 1982. At the initial stage the

fluctuation of exchange rate is very nominal. However, exports evolved broadly in line

with total world imports. Pakistans share in world imports was stable during the last 24

years, ranging between a minimum of 0.12 percent in 1980 and a maximum of 0.18

percent in 1992. In 2002-2003 the share was 0.17 percent. This suggests that Pakistans

exports performance was based on the volatility of exchange rate. Only one empirical

study is available regarding to Pakistans context. Kumar and Dhawan (1991) estimated

the exchange rate volatility on Pakistan exports to the developed world from 1974 to

1985. They found that volatility of exchange rate adversely effect on export demand.

They also investigated the third country effect and suggested that Japan and West

Germany act as the alternate market for Pakistans export to the United States and United

Kingdom.Like most developing countries, in Pakistan also, the domestic price level started rising from the mid-1970s. The exchange rate started depreciating continuously from the early 1980s. Continuous devaluation of currency and inflation in the 1980s seems to suggest a correlation between the two variables.

In most of the developing countries flexibility of exchange rate is favored on the ground that it depoliticizes the problem of devaluation and creates less disruption in the economy. Another adverse impact may be that real exchange rate may remain stable but in some instances lead to anti-export bias.

Since 1982 the Pak rupee has been characterized by a managed float; the

rupee was pegged to a basket of currencies with the US dollar being the main anchor

currency. In July 2000 this system was replaced by a free float. However, we can

argue that in practice regular State Bank of Pakistan (SBP) intervention continues,

and therefore the issues of real depreciation to correct the trade balance still remain

relevant.

Exchange rate impactThe monetary policy in Pakistan aims at stabilizing the domestic and external value of the

currency and to foster economic growth. Therefore, the exchange rate pass-through to

domestic wholesale and consumer prices is an important link in the process of monetary

policy transmission. Since Pakistans economy has a considerable degree of openness to

foreign trade, the domestic price level cannot remain immune to external price shocks i.e.

exchange rate depreciation/appreciation and changes in import prices. Any appreciation or depreciation of the exchange rate will not only result in significant changes in the prices of imported finished goods but also imported inputs that affect the cost of the finished goods and servicesSpecifically, exchange rate movements can influence domestic prices through direct and indirect channels.. In case of direct channel, exchange rate movements can affect domestic prices through changes in the price of imported finished goods and imported inputs. In general, when a currency depreciates it will result in higher import prices while lower import prices result from appreciation in price taker countries like Pakistan. The potentially higher costs of imported raw material and capital goods associated with an exchange rate depreciation increase marginal costs and lead to higher prices of domestically produced goods. In case of indirect effect, the exchange rate depreciation affects the net exports which in turn influence the domestic prices through the change in aggregate demand, putting upward pressure on domestic prices. In addition, import-competing firms might increase prices in response to foreign competitor price increases in order to maintain profit margins. However, the extent and the speed of exchange rate pass-through depends on several factors such as market structure, pricing policies, general inflationary environment, involvement of non-tradable in the distribution of tradable,

Conclusion:Hence it is concluded that exchange rate shows the value of one currency with respect to other. Currency rate is very helpful in determining value of countrys currency in money market. The exchange rate is a conversion factor, a multiplier or a ratio, depending on the direction of conversion.Demand and Supply of Foreign Exchange influences the determination of exchange rates and vice versa. . A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supplyFluctuations in the exchange rate exert a powerful impact on exports, imports and the trade balance. A high and rising exchange rate tends to depress exports, to boost import and to deteriorate the trade balance, as far as these variables respond to price stimuli. Consumers find foreign goods cheaper so the consumption composition will change. Similarly, firms will reduce their costs by purchasing intermediate goods abroad.

Pakistan follows the flexible exchange rate system since 1982. In July 2000 this system was replaced by a free float. In Pakistan, the exchange rate pass-through to

domestic wholesale and consumer prices is an important link in the process of monetary

policy transmission. Specifically, exchange rate movements can influence domestic prices through direct and indirect channels. Exchange rate fluctuation is an indication of countrys economic condition at present.