Pakistan's exporters who have historically espoused the US dollar as their preferred trading currency are now demanding euros from their European trading partners as their currency gains forges ahead of the US dollar, a movement that apparently has gained momentum as the likelihood of US-led strikes against Iraq increase.

The increased strength of the euro and a weakening US dollar have prompted exporters in Pakistan to demand that European importers open euro rather than US dollar denominated letters of credit (L/Cs).

Euro appreciation

The European currency has appreciated 14.3 per cent against the rupee (R) since its launch in January 2002 when one Euro cost Rs 54. By mid-February 2003, 61.74 Rs bought one euro.

On global money markets, one Euro that cost 80 US cents in December 2002 cost 108 cents by January of this year.

European reluctance

"We now demand that our European importers open L/Cs in euros instead of dollars," says exporter Shabir Ahmed, a former chairman of Pakistan's Bedwear Exporters' Association.

Ahmed told the AFP new agency that European importers were however reluctant to use their own currency. "They have been evasive because of the appreciating value of the euro against the [US] dollar," he says.

L/C shift

Despite this reluctance, there is a marked shift of L/Cs from US dollars to euros, according to Elixir Securities' head of foreign exchange, Mohsin Ahsan.

"Based on bankers' conservative estimates, well over US$1 billion of L/Cs are being established in euros by European importers," Ahsan told AFP. Textile exports to Europe are in the region of US$5 billion a year.

Fading allure

The US dollar started to lose its shine as a glut of dollar remittances, foreign aid and grants flooded into Pakistan in reward for its post-September 9/11 support for the US-led war against terrorism.

Foreign exchange reserves that amounted to US$3.38 billion on 9/11 have swollen to US$9.5 billion, thus discouraging speculative money market trades in US dollars. Some analysts suggest that Pakistan now needs to fill its foreign exchange reserves with euros.

The US dollar is expected to remain under pressure until the US economy shows signs of strengthening. In the meantime, analysts in Pakistan are expecting further US dollar slides and increased euro-demand as the prospects of a US-led attack on Iraq loom closer.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.