How does pumping dollar in open market appreciate local currency

Question

Pakistan economy is in trouble and dollar rate is out of control recently government pumped dollar in open market which brought down dollar rate against local currency? How can I explain this mechanism

Answer 1

I don't stay up to date with the FX (foreign exchange) market, so I can't comment on what an out of control dollar rate is. I believe your referring to the exchange rate of the Pakistan rupee (PKR) to the US Dollar (USD). Exchange rates on open markets are determined by many things like the inflation and interest rates of the two countries, as well as expectations and the supply and demand for the various currencies.

In the scenario your describing we could explain it from a supply side. Suppose there is a strong demand for USD but a short supply of USD. All other things being equal the more scarce a particular good is, in this case USD, the higher the price. Hence more PKR would be wanted for every USD. Now suppose the supply of USD was increased, lowering the scarcity, this would lower the 'price' or the amount of PKR required to buy USD, or lower the exchange rate.