The document discusses several key factors that affect exchange rates between the Pakistani rupee and US dollar: 1) Inflation - Higher inflation in Pakistan relative to the US has contributed to the rupee's depreciation against the dollar. 2) Declining foreign reserves - Pakistan's debt repayments to the IMF have reduced its foreign reserves, putting downward pressure on the rupee. 3) Balance of payments - A lack of expected inflows like remittances and US aid have exacerbated Pakistan's current account deficit and weakened the rupee.

1. Exchange Rate
Submitted To
Sir. Imran
Submitted By
Husnain Haider
Roll No 27

2. Factors affecting Pakistan currency exchange rate and USD exchange rate.
Factors that affect the Pakistan currency and USD exchange rate.
There are five main factors that affects any countrys exchange rate that includes
USA and PAKISTAN.
1. Inflation
The rate at which the general level of prices for goods and services is rising is
known as the inflation rate. If, for example, inflation were lower in the USA, the
purchasing power of the dollar would increase relative to other currencies. USA
exports become more competitive and the demand to purchase USD for USA
goods will increase. Higher interest rates usually follow. Countries therefore with
lower inflation rates will tend to see an appreciation in the value of their currency.
2. Interest rates
There is also a high correlation between inflation, interest rates and exchange rates.
Depositing money in the US for example becomes more attractive if US interest
rates rise relative to other countries. By saving in US banks, a better rate of return
will cause the demand for the dollar to rise. Central banks also can influence
inflation and currency exchange rates by manipulating interest rates. If however
the inflation rate is much higher in the US than in other countries, then, higher
interest rates will have little impact in an appreciation of the dollar.

3. 3. Speculation
Political events or changes in commodity prices may cause a currency to fall in
value. If speculators believe the Rupee will fall, they will sell now for a currency
they feel will rise in value. For this reason, sentiments in the financial markets can
heavily influence foreign exchange rates. If the markets are alerted to the
possibility of an interest rate increase in the rupeezone we are more likely to see a
rise in the valuation of the Rupee as a result. Because a government’s reserve of
foreign currency is quite low compared to daily turnover in the market, the power
of speculators is quite significant in exchange rate influence.
4. Balance of payments/current account deficit.
If the value of imports is greater than the value of exports, this means there is a
deficit in the current account. This deficit is a result of more spend on foreign
goods and services by a given country than it is earning, and borrowing from
foreign sources to make up the deficit is usually a feature. A lack of capital inflow
to finance a current account deficit will inevitably lead to depreciation in the
currency.
5. Public debt
A country’s debt rating is also a factor which has influence over its currency
exchange rate. Public sector projects sometimes require large scale deficit
financing which boosts the domestic economy. However, foreign investors are less
likely to invest in countries with large public deficits and government debt. Fear of
a debt default can result in the selling of bonds denominated in that currency by

4. investors, resulting in a fall in the value of the exchange rate. Governments may
also need to print money to pay parts of a large debt, resulting in inflation.
Pakistan Rupee declining factors: Lack of foreign inflows adding fuel to the
fire
During 10MFY12, remittances from overseas Pakistanis jumped by 20.2% to
USD10.88bn, which helped improve the Balance of Payments (BoP) to some
extent. Other factors that Pakistan was expecting to contribute to deficit financing
were Coalition Support Fund (CSF), US aid, 3G auction and Etisalat payments.
However, non-materialization of these inflows exerted pressure on financial
account and PKR started weakening against USD from PKR 85.95 (July-
11) ending up at PKR 93.66 (Jun-12), a decline of 9% YTD.
Pakistan Rupee declining factors: Declining Forex Reserves
Another reason for detrimental condition of PKR is the GoP’s debt repayment
obligations under the IMF’s SBA, with the three tranches of USD 1.2bn and other
debt obligations equaling USD1.7bn to date being made by GoP. This took SBP’s
Liquid Reserves to around USD 11.5bn. In FY13, GoP is obligated to repay USD
1.53bn to the IMF, which may in return exert downward pressure on the PKR,
hence threatening to further erode the value of PKR.
PakistanRupee declining factors:Purchasing PowerParity theory comes into
play
Exchange rate, as per purchasing power parity theory, is affected when the two
countries have different inflation rates. Economies having higher inflation
demonstrate currency depreciation and vice versa due to varying purchasing power

5. over a period of time. Pakistan’s inflation rose from 11% to 12.3% MoM (April-
May), where as inflation in US dropped down from 2.7% to 2.3% MoM in the
same period. So with PPP theory holding true, PKR depreciated to record lows
during this period. If this trend persists, PKR remains under a threat of further
erosion in value.
Foreign Currency Reserves USA.
The dollar is held by foreign governments in their currency reserves. They wind up
stockpiling dollars as they export more than they import. They receive dollars in
payment. Many of these countries find that it's in their best interest to hold on to
dollars because it keeps their currency values lower. Some of the largest holders of
U.S. dollars are Japan and China.
As the dollar declines, the value of their reserves also decreases. As a result, they
are less willing to hold dollars in reserve. They diversify into other currencies, such
as the euro or even the Chinese yuan. This reduces the demand for the dollar. It
puts further downward pressure on its value.
As of the fourth quarter of 2016 (most recent report), there was $5.053 trillion in
foreign government reserves held in dollars. That's the highest in at least the past
year. That's 64 percent of the total measurable reserves. It's down from 67 percent
in Q3 of 2008. This decline means that foreign governments are moving their
currency reserves out of dollars. This occurred despite the eurozone crisis.
Nevertheless, holdings in euros are less than a third of the amount held in dollars.
(Source: "COFER Table," International Monetary Fund.