The article reports the significant depreciation (the fall in value of a currency thus it takes more units

of that country’s currency to buy another country’s currency) of US dollar against Pakistani rupee,
which keeps on gaining its value. From the article, the sign of devaluation of US dollar and increase
in Pakistani rupee value occur as a result of a great amount of dollar inflow in the country and other
factors. It is expected that the value of dollar is going to follow the decreasing trend due to more
sources of inflow coming to Pakistan. As a sign of its downward trend, dollar depreciates by Rs 1.66
in just a single day on exchange rate market.

The US dollar exchange rate experiences a sharp depreciation compared to last year rate (from Rs
112 to Rs 101.66). Even though before this significant fall, US dollar remained constant for a two-
moths period with the rate of about Rs 105-106. A fall in the exchange rate of a country's currency
can occur due to market forces, where changes in the demand for or supply of a foreign currency
change the equilibrium price. The US dollar is this context can be considered as floating exchange
rate (exchange rate regimes where the currency is allowed to be determined by the demand and
supply of the currency on the foreign exchange market). However, in reality, floating exchange rates
are affected by more factors than simply demand and supply such as government intervention, world
events or speculation.

Price of $ in rupees Supply of $

from US/ S1

S2

Rs 112

Rs 101.66

Demand for $ from

Pakistan/ D1

0
Q1 Q2 Quantity of $

Fig.1. An increase in the supply of the US dollar

An increase in the supply of the US dollar is shown in Fig.1. As we can see, an increase in the supply
of the US dollar on the US dollar/rupee market shifts the supply curve of the US dollar to the right
from S1 to S2 and the quantity of US dollar increases from Q1 to Q2. When this occurs, the value of the
dollar will depreciate and it will now be worth Rs 101.66 as each US dollar may be exchanged for a
smaller amount of Pakistani rupees. The slope of supply curve is upward because as its price rises,
holders of that currency can obtain other currencies more cheaply and will want to buy more
imported goods and, therefore, will give up more of their currency to obtain other currencies. Whilst
the slope of demand curve is downward because since a currency becomes less expensive, people
might want to buy more of its goods and services, thus foreigners demand larger quantities of the
currency as it depreciates.

According to the article, the US dollar depreciates due to several factors. First of all, due to the
“handsome” inflow of US dollar from various sources or in other words, there is an increase in supply
of US dollar in Pakistan. For example, the market sentiment has contributed about $750 million into
country’s exchange reserves in which means that Pakistan now have more investments from foreign
investors. Furthermore, speculation (deliberate assumption of above average short-term risks of
financial loss, in expectation of above average gain from an anticipated change in prices) is also one
of the main reasons for this increasing supply of US dollar. If investors expect the Pakistani rupee to
appreciate relative to the dollar, demand for rupees will increase.

Theoretically, the depreciation of US dollar has several effects on US’s trade and its balance of
payment. Firstly, the exports of a country will be cheaper whilst imports will become more expensive
hence there might be an increase in exports and a decrease in imported quantities. More money is
coming in through exports and less money is going out through imports implies the US’s current
account deficit could be improved eventually. However, the success depends on the fact that if the
total value of the price elasticity of exports demanded and the price elasticity of imports demanded is
greater than one according to Marshall-Lerner condition. Additionally, depreciation of US dollar may
reduce their terms of trade yet it might not remain unchanged if the export prices rise due to
increasing demands.

In conclusion, the exchange rate in the short run is expecting to keep on depreciating as a result of
further inflow of US dollar into country’s reserves such as $2 billion from 3G/4G auction then the
Pakistani rupee might remain high in relative to US dollar. In the long run, it bases on many factors to
determine the outlook of exchange rate for both countries.