June 28, 2012 (LBO) – Sri Lanka’s rupee rose as much as 132.50 in intra-day trading on Thursday amid state bank selling before settling around 132.80/133.00 after a weak start, dealer said. Analysts however have urged the central bank not to allow excess liquidity to remain in the system as unsterilized purchases will eventually create fresh import demand requiring the collected dollar to be sold again to prevent a weakening of the currency.
There is also an International Monetary Fund test date coming at the end of the month.
Sri Lanka only has a foreign reserve performance criterion to meet as both reserve money and domestic borrowings are indicative targets according to the last letter of intent.
However a strengthening dollar can reduce the value of non-dollar reserve assets, including gold. The spot rupee weakened as much as 134.40 against the spot US dollar earlier in the day, dealers said.
Though the rupee is seen to have weakened against the US dollar, from the beginning of May most floating currencies also weakened against the US dollar, and the rupee should also weaken if the currency is free floating, analysts say.
The rupee has remained fairly steady against floating currencies such as the Euro, Canadian Dollar, Australian dollar and even the partially floating Malaysian ringgit since the beginning of May for around two months.
A strengthening of the US dollar is usually also associated with falling commodity prices.
Over the past two months, the Central Bank has been able to buy US dollars allowing excess liquidity to build up in interbank markets, which analysts say indicates that major pressure is off the rupee.