Appreciation and Depreciation of Dollars

Dollar:

The official currency of United States is Dollar ($). It is

abbreviated as USD or US$. This abbreviation is used to
make difference between US$ and other Dollar
denominated currencies. It is divided into 100 cents. The U.S. dollar is the
currency most used in international transactions.

Appreciation of Dollar:

Appreciation of a currency means that the currency has become more

valuable as compare to other currency. Appreciation of dollar means that it
has become more valuable than other currencies and the purchasing power
of appreciated country’s people has also increased or in case of receivables
investors will get more dollars. I.e. $ 1= Rs. 85.10

Reasons for appreciation of Dollar:

Supply:

A reduction in money supply due to credit market losses lead to a rise in

price. Eventually the price of any item (commodity, service or currency) is
determined by demand and supply.

Depreciation of Pakistani Rupee:

Pakistan currency has devalued against U.S Dollar which has increased the
value of Dollar. Depreciation of Pak Rupee means that the investors have to
pay more for buying U.S Dollar or more for imports. When one currency
depreciates it appreciates the currency of other country.

Depreciation of Dollar:

It is just opposite to appreciation of dollar. Depreciation of dollar means that

its value has decline as compare to other currencies. The purchasing power
of depreciated currency’s country has also decreased and in case of
payables more dollar amount would be needed to pay off debts. I.e. $ 1= €
1.70.

Reasons for depreciation of Dollar:

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 Appreciation and Depreciation of Dollars

Following are the reasons for depreciation of US dollar:

 Lower US interest rates:

The US has cut interest rates in 2007 by 0.75%; this is in contrast to

the EU where interest rates have increased. Lower interest rates make
it less attractive to save money in America compared to the rest of the
world. Therefore, demand for dollar has fallen.

 US Current Account deficit:

The US has a large trade deficit. This means the outflow of currency is
less than the inflow. There is a strong downward pressure on the
exchange rate when the current account deficit is high.

 Fall in Demand for US Securities:

In the past the US current account deficit has been financed by capital
inflows. Basically, the US has been importing goods, but China has
been using its foreign exchange reserves to buy US debt - mostly
government debt. This means that the capital inflows kept the dollar
higher than it would have been. However, Asian countries are now
starting to diversify away from the dollar. The dollar is no longer seen
as the best investment, due to weaknesses in the US economy.

 Market Confidence:

With a falling dollar, many investors are now feeling that the dollar is
no longer a good investment. There is a growing feeling that the US
dollar will lose its position as the world major reserve currency. This
has caused investors to diversify out of the US dollar.

 Strength of the Yuan:

For many years the US, and others, have wished the Yuan to
appreciate in value, to reflect its new status as a powerful currency.
Slowly the Chinese government is allowing the Yuan to appreciate and
better reflect local purchasing power parity.

 Housing Market Slump:

The US housing market has suffered a severe reverse. Mortgage

arrears have increased due to problems in the sub-prime market.
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Problems in the US housing market are causing lower growth and

discouraging foreign investors from buying dollars.

Impact of Dollar on U.S economy:

 On the short term basis dollar depreciation may increase stock prices
especially with local and foreign investors.

 Dollar appreciation may decrease stock prices. Consumers spending

will also decrease because of inflation and less money to buy stocks on
the whole a strong dollar is good for its economy.

Rupee:

The Pakistani Rupee was pegged to the US Dollar until 1982.

When the government of General Zia-ul-Haq, changed it to
managed float. This has been regarded as the best decision
by Zia. As a result, the rupee devalued by 38.5% between 1982/83 and
1987/88 and the anti-export bias in the economy was reduced. The basic
unit of currency is the Rupee, ISO code PKR and abbreviated Rs, which is
divided into 100 paisas.

Foreign exchange rate:

The Pakistani rupee depreciated against the US dollar until the turn of the
century, when Pakistan's large current-account surplus pushed the value of
the rupee up versus the dollar. Pakistan's central bank then stabilized by
lowering interest rates and buying dollars, in order to preserve the country's
export competitiveness.

In the month of April, 2008, Pakistani Rupee was at a 64 rupee level against
US Dollar. If we go further back few months, then we will find US Dollar at 60
rupee in the Inter-Bank Market.In the past 10 or so months, the rate of US
Dollar has increased almost 30% against the Pakistani Rupee. The rate of
Pakistani Rupee reached 81.4 rupees in the open market on 16th of October,
2008. Now US dollar rate is 85.10 rupee, this was the highest ever value
gained by US Dollar against Pakistani Rupee in the history of Pakistan.

Monthly Average Exchange Rate:

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NOTE: The figures are till August 2008.

Exchange rates: Pakistani rupee (PKR) per US$1:

RATE YEAR/DATE

 85.10 (27/05/10)

 84.00 (16/10/08)

 71.50 (26/07/08)

 63.50 (01/04/08)

 60.50 (01/11/07)

Impact of dollar fluctuation on Pakistan economy:

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An increased US Dollar rate means weakened Pakistani currency. When the

currency is weakened, the overall economy suffers. Pakistan’s economy is
already in a bad situation. The world wide bad economic situation has made
things even worse for Pakistan and other third world countries.

State Bank of Pakistan is trying its best to try to improve the economic
situation by stabilizing the US Dollar rate. State Bank recently pumped in 50
Million Dollars in the open market in order to stop the fast increasing price of
US Dollar against Pak Rupee.

State Bank of Pakistan took different steps in order to prevent further drop in
Pak currency. Let’s hope Pakistan economy and world’s economic situation
gets better.

Impact on Pakistan import:

When dollar appreciated it will affect the Pakistan import and export, when
dollar appreciated against PAK rupee the payables on import increases.
Investors pay high amount against the import. It is not beneficial for the
economy of Pakistan because the mostly raw material for the industries is
imported from other countries and the payment is made in dollar. Pakistani
imports from the U.S. rose 59% to $2 billion in 2006, up 187% since 2002.
The huge amount of dollar reserves spend on purchase of raw material and
appreciation of dollar discourage the investors to invest in Pakistan. The
luxury items are also imported in Pakistan so it is very dangerous for
Pakistani economy to pay in dollar. The devaluation makes foreign products
relatively more expensive for domestic consumers, thus discouraging
imports.

Impact on Pakistan export:

The exports are less as compared to import to other countries in Pakistan.

When dollar will appreciate and Pak rupee will depreciate it means the
receivable will less it will also affect the Pakistan economy. Pakistan’s total
exports to USA are $3.7 billion in 2006. When currency will devalue Imports
will become more expensive. This will reduce demand for imports.

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Devaluation may help to increase the country's exports and decrease

imports, and may therefore help to reduce the current account deficit. Over
80% of Pakistani exports to the United States are cotton products, while
Pakistan's fastest growing imports from the U.S. include military guns, tanks
& missiles. A devaluation of the exchange rate will make exports more
competitive and appear cheaper to foreigners. This will increase demand for
exports.

U.S AID to Pakistan:

U.S. assistance to Pakistan is tangibly improving Pakistani lives. Since re-

opening its mission in Pakistan in 2002, US AID has provided over $3.9 billion
to support economic growth, improve education, revitalize health, promote
good governance, facilitate earthquake reconstruction, and provide
humanitarian assistance.

U.S assistance and its benefits to Pakistan economy:

 Governing Justly and Democratically:

US AID supports the Government of Pakistan (GOP) at all levels to build

public trust, address citizen priorities, and enable government
institutions to fulfill their roles and responsibilities in a transparent and
accountable manner. Through its existing projects and future planning,
USAID supports the GOP to promote the rule of law, strengthen local
governments and legislative institutions, and develop a credible and
transparent electoral system. These projects aim to produce leaders
and policy makers who can help Pakistan achieve its Millennium
Development Goals.

 Investing In People: Health:

US AID’s health program works closely with Pakistan’s Ministries of

Health and Population Welfare, the private sector, and other donors.
The program helps Pakistan meet family planning needs, improve
maternal and child health, and control major infectious diseases. The
program, working in selected districts, also develops essential systems
for supply chain management, human capacity growth, and integrated
disease surveillance in the health sector.

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 Investing In People: Education:

US AID’s education program supports efforts to educate teachers,

foster education policy reforms, improve school enrollment and
outcomes, provide facilities in schools, and expand basic literacy skills.
Increased access to quality education enhances future livelihood
opportunities for Pakistanis. US AID also provides scholarships to
thousands of needy and talented students to complete degrees in
Pakistan and the United States in areas that are critical for Pakistan’s
political and economic stability.

 Investing In People: Social Assistance:

US AID directly supports the GOP in its efforts to provide social and
economic services and protection for women affected by conflict. The
U.S. provides funds to the Benazir Income Support Program, providing
a safety net support to Pakistan’s poorest and most vulnerable
families.

 Creating Opportunities: Economic Growth:

Sustained economic growth and job creation are critical to Pakistan’s

political and economic stability. The U.S. Government supports
Pakistan’s economy by increasing the energy supply, strengthening
businesses, improving agricultural productivity, training youth, and
expanding financial services. USAID supports the GOP and the private
sector in addressing challenges such as improving the energy supply
and enhancing efficiency. The initiatives aim to increase returns in
agriculture and promote private sector growth.

 Humanitarian Assistance: Earthquake Reconstruction:

The October 2005 earthquake caused massive loss of life and damage
in the Azad Jammu and Kashmir region and Pakistan’s North West
Frontier Province (NWFP). Along with other donors, the U.S.
Government provided medical and social relief to 2.6 million survivors
and helped them return to their lands. USAID’s $200 million, five-year
Earthquake Reconstruction Program is rebuilding 56 school complexes
and 19 hospital facilities destroyed by the earthquake; reviving and
improving education and health care services by training teachers and
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medical staff; and restoring livelihoods with expanded economic

opportunities.

 Emergency Assistance:

Since 2008, conflict has displaced nearly 3.1 million individuals from
the Federally Administered Tribal Areas (FATA) and NWFP. In response,
USAID has provided $300 million in humanitarian assistance, including
nearly $106 million through the Office of U.S. Foreign Disaster
Assistance (OFDA), $119 million through the Office of Food for Peace
(FFP), and nearly $74 million in Mission funds. This represents the
largest donor contribution to emergency assistance in Pakistan since
2008.

US AID supported the provision of emergency relief commodities and

food assistance; water, sanitation, and hygiene facilities; and programs
for health, nutrition, shelter, protection, cash-for-work, and early
recovery activities.

OFDA also provided more than $2.2 million in response to recent

flooding and more than $2.3 million in assistance following the October
2008 earthquake near Quetta.

Depreciation of Dollar as compare to Euro:

 Euro:

The euro, introduced in 2002, has already become the second-most

traded currency behind the dollar. As of November 2008, the euro
currency had the largest combined value of cash in world circulation.
Since 2002, the dollar has generally fallen in value compared to the
euro.

After the introduction of the euro, the U.S. dollar has steadily
decreased in value, or "depreciated" relative to the euro. In 2002, one
euro could purchase between 0.98 and 1.17 U.S. dollars. By 2004, one
euro could purchase between $1.20 and $1.30. By 2009, the average
exchange rate was 1 euro to between $1.23 and $1.49.

 Depreciation of the Dollar:

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Various economic thinkers have analyzed the reasons for the dollar's
relative decline against the euro, and against world currencies
generally:

 First, the rising U.S. budget and trade deficits were and continue
to be negative throughout this period--which weakens the dollar.

 Second, economists speculate that the dollar's fall might be

partly because other countries are decreasingly using the dollar
as a reserve currency.

Developments after 2008:

The financial crisis of 2008 severely affected the world's economy. The U.S.
dollar gained value during this time against most other world currencies. The
rate fluctuated from roughly $1.50/euro in summer 2008 to $1.20/euro by
November. One possible reason for this was the U.S. dollar's historical role as
a safe monetary unit. However, after the spring of 2009, the dollar once
again weakened against the euro.

Trade in dollar:

As U.S.A is helping out Pakistan by giving aids and debts that’s why it has a
greater influence on Pakistan. Pakistani currency has been pegged with
dollar that gives Pakistan help to trade easily and established its image in
import and export because the Dollar is more valuable than Pak Rupee. Now
Pakistani currency has unpegged from Dollar. As now Pakistan has
established good relations with different strong countries and Dollar is also
decreasing in value Pakistan has no such need to deal in dollar anymore. It
should also use other currencies to trade. SBP is also trying to improve Pak
Rupee value and if it occur Pakistan will not need help of other currencies
and it will be able to better use its home currency.

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References:

 www.google.com

 www.yahooanswer.com

 www.scribd.com

 www.wikipedia.com

 Some information is provided on basis of prior knowledge.

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