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During the month of May’08 Pakistan Inter-bank and Kerb forex markets
witnessed a sharp decline in Pak Rupee value versus US$. Despite the Central
Bank’s intervention and some regulatory steps, Pak Rupee continuously losing
its value. Under a floating FX rate system, the exchange rate decline is
expected & a necessary component of the adjustment mechanism.
There are so many factors that cause currency crises to occur, i.e. economic,
political, corruption, etc., but to determine the route causes of current crises,
let us focus only on the major economic variables, these variables are
interlinked with each other, therefore, it cant be sure that which one triggers
the other:
g) The Real Exchange Rate: Real FX rate = The relative price of two
identical baskets of goods in the two countries. Increase in the real
exchange rate creates currency devaluation pressures, because it
hurts all firms that are exposed to foreign competition. Exporters
suffer, because their costs are higher when measured in terms of
foreign currency. Firms facing import competition are hurt, because
foreign producers are under no pressure to increase prices with
domestic inflation. The impact of an increase in the Real Exchange
Rate depends to a great degree on the Trade to GDP ratio, an
appreciation of the Real Exchange Rate of a country with a high Trade
to GDP ratio is particularly worrisome because exports are not
competitive in world markets, and imports capture a greater market
share in the domestic market.
Some, experts firmly believes that it’s a speculative pressure which may not
go too far, due to some upcoming major influx of US$ into domestic market,
and rupee should eventually stabilize around Pak Rupee 65-66/US$ bend.