Sri Lankan rupee weakens further against dollar

August 20, 2007 (LBO) – A Sri Lankan state bank’s offers for spot dollar moved above 112 rupees Monday with the bank, which usually represents Central Bank transactions, offering at 112.04, dealers said. On Friday, inter-bank deals closed above 112 despite the official offer being at 111.97.

Import demand is seen driving the local currency lower, dealers said.

The spot rate was 112.24 in mid-morning trade and the currency was likely to weaken despite intervention from the state bank.

“There’s import demand seen in the market,” said a dealer, “That could be the reason for it (dollar) to get pushed up.”

Although the state bank was offering dollars, dealers said buyers seemed reluctant to buy from it.

“There’s a lot of demand from other parties,” said a dealer. “The state bank is intervening at 112.04 but no one is willing to buy from him because they would be reported to the Central Bank and would come under criticism.”

The Sri Lankan rupee has been hitting new life lows in recent weeks with perceptions that the currency is set to weaken further owing to weakening macro-economic indicators.

A ballooning budget deficit and high inflation coupled with a heavy import bill, particularly owing to dependence on oil imports, is putting pressure on the rupee.

The currency has come under pressure as importers buy dollars to settle trade bills and brokers buy forward dollar contracts.

Dealers said the government appears to be hoping that a forthcoming dollar bond issue would ease the pressure and give it some breathing space.

The Central Bank is seeking to raise 500 million dollars through a sovereign bond issue around mid-October.

Dealers said the rupee could fall to around 118-120 to the dollar by year’s end.

The island’s currency has depreciated by more than four percent this year, much faster than last year when it fell around five percent during the whole year.