Volatility in Forex:

Volatility (in Forex trading) refers to the amount of uncertainty or risk involved with the
size of changes in a currency exchange rate. A higher volatility means that an exchange rate can
potentially be spread out over a larger range of values. High volatility means that the price of the
currency can change dramatically over a short time period in either direction.
On the other hand, a lower volatility would mean that an exchange rate does not fluctuate
dramatically, but changes in value at a steady pace over a period of time.
Commonly, the higher the volatility, the riskier the trading of the currency pair is.

How Fluctuations in Forex affect the Economy???
A currencys level has a direct impact on the following aspects of the economy:

Merchandise trade:
This refers to a nations international trade, or its exports and imports. In general terms, a
weaker currency will stimulate exports and make imports more expensive, thereby decreasing a
nations trade deficit (or increasing surplus) over time.
Conversely, a significantly stronger currency can reduce export competitiveness and
make imports cheaper, which can cause the trade deficit to widen further, eventually weakening
the currency in a self-adjusting mechanism. But before this happens, industry sectors that are
highly export-oriented can be decimated by an unduly strong currency.
Capital flows:
Foreign capital will tend to flow into countries that have strong governments, dynamic
economies and stable currencies. A nation needs to have a relatively stable currency to attract
investment capital from foreign investors. Otherwise, the prospect of exchange losses inflicted
by currency depreciation may deter overseas investors.
Inflation:
A devalued currency can result in imported inflation for countries that are substantial
importers. A sudden decline of 20% in the domestic currency may result in imported products
costing 25% more since a 20% decline means a 25% increase to get back to the original starting
point.
Interest rates:
As mentioned earlier, the exchange rate level is a key consideration for most central
banks when setting monetary policy. A strong domestic currency exerts a drag on the economy,
achieving the same end result as tighter monetary policy (i.e. higher interest rates). In addition,
further tightening of monetary policy at a time when the domestic currency is already unduly
strong may exacerbate the problem by attracting more hot money from foreign investors, who
are seeking higher yielding investments (which would further push up the domestic currency)
Exchange Rate in Pakistan:
The history of exchange rate shows a continuous trend of deprecation each year since 1983/3
with the rupee losing considerable value in some years compared to the previous years . It lost 17
pre cent in 1996/7 compared to the value in 1995/6 and again nearly 16 pre cent in 1998/9 over
the previous year. It has lost value every single year since 1982 with the exception of the last
fiscal year for which we have data 2002/3. In 2002/3, the rupee has appreciated in value against
the US dollar bucking the earlier trend. The reasons for this are the events and developments
since 1998. Numerous factors and events have taken place since then which have bearing on
Pakistans economy in an important way, on foreign exchange reserves and on the exchange rate.

The depreciation of Pakistan rupee remained closer to 0.6 percent during the first ten months of
financial year 2005-2006. The exchange rate changed from Rs. 59.6266/1 to Rs. 60.0218/1 dollar
during this period. While, open market exchange rate at the end of tenth month of the same
period was Rs.60.0 .The premium in the open market was 0.02%. The depreciation of Pakistani
rupee in the open market was 0.5 percent as against the same ten months period of last financial
year. In short, it can be said that stability is seen in exchange rate of rupee during the fiscal year
2005-2006
Prediction of Value of Pak Rupee with respect to Dollar, Euro and Yen for
next 3 years:
Value of Pakistani rupee with respect to dollar will continue to decrease as it has been
decreasing since our independence, though its pace may slow due to rise of Asia century
and sluggish Americas economic growth.
With respect to Euro it will remain unchanged or even decrease. This is so because
European century has ended. Moreover Europes economic growth is very poor. In future
most of the European countries will decrease the values of their currencies to keep their
export afloat.
While with respect to yen Pakistani rupee may devalue remarkably as it is happening in
these days. Reason is very simple and obvious. Pakistani trade deficit with respect to
china is hopingly high and it will increase when Pakistan shift its trade links from west to
china. So Chinas yen will gain tremendous value as is being pressurized by America. the
clash continues.
Conclusion :
Currency moves can have a wide-ranging impact not just on a domestic economy, but
also on the global one. Investors can use such moves to their advantage by investing overseas or
in U.S. multinationals when the greenback is weak. Because currency moves can be a potent risk
when one has a large forex exposure, it may be best to hedge this risk through the many hedging
instruments available.