Rupee weakens as tensions loom in Middle East

KARACHI: The Pakistani rupee declined on Monday as investors were worried about volatility in global oil prices and assessed its impacts on the country’s inflation and external account outlook amid rising tensions in the Middle East.

The rupee closed at 283.87 against the U.S. dollar in the interbank market, down 0.06% from the previous close of 283.70. In the open market, the rupee traded at 285.89 per dollar, compared with the previous close of 285.73.

Tensions escalated sharply in the Middle East following the US attack on Iran’s nuclear sites over the weekend. Investors were cautious, awaiting possible retaliation from Iran, which had threatened to close the Strait of Hormuz -- a vital maritime route through which over 20 per cent of the world’s oil supply flows.

According to a Reuters report, Brent crude futures rose by 16 cents, or 0.2 per cent, to $77.17 a barrel on Monday. Meanwhile, US West Texas Intermediate crude increased by 14 cents, or 0.2 per cent, to $73.98 a barrel.

Saad Hanif, head of research at Ismail Iqbal Securities, said that the rupee is currently facing mild downside pressure, trading around Rs284/USD, primarily due to rising oil prices and concerns regarding the external account.

“However, strong remittance inflows, improving reserves, and IMF programme support are helping stabilise the currency. In the near term, a gradual depreciation towards Rs290-300 is likely, but no sharp collapse is expected unless external shocks worsen significantly,” Hanif added.

For Pakistan, any sustained rise in oil prices poses significant macroeconomic risks. As a net importer of energy, higher oil prices can widen the current account deficit, exert pressure on the rupee and push inflation higher, said Chase Securities in a note.

“Given the sizable weight of fuel in the CPI basket, a 10 per cent increase in oil prices generally translates into a 0.4 per cent to 0.6 per cent rise in headline inflation. This may limit the central bank's room to pursue monetary easing in the near term,” it said.

Pakistan recorded a current account surplus of $1.8 billion during the 11 months of the fiscal year ending in June, in contrast to a deficit of $1.6 billion in the same period last year.

The SBP forecasts the current account to remain in surplus for fiscal year 2025. Despite weak net financial inflows so far, the SBP anticipates that its foreign exchange reserves will increase to approximately $14 billion by the end of June 2025. It said the external outlook remains vulnerable to several risks, primarily arising from heightened geopolitical tensions, fluctuations in international oil prices, potential negative impacts of proposed budget measures and possible shortfalls in anticipated financial inflows.

Tresmark reported on Saturday that the increasing difficulty in accessing dollars created noticeable anxiety in the currency markets. On Friday, the interbank rate closed at 283.7, while importers were quoted between 284.25 and 284.5. Meanwhile, open market selling rates were around 285.7. Interestingly, banks were offering Rs1-2 higher rates for remittances, likely to boost their remittance numbers.