Dollar gets upward push as BB buys $10m more in auction at even higher rate

In a strategic move to signal an upward shift in the dollar market, the Bangladesh Bank (BB) purchased $10 million from commercial banks via auction yesterday – raising the cut-off rate by Tk0.45 within just eight days.

Confirming the transaction, a deputy governor of the central bank told TBS that the cut-off rate for the dollar auction was set at Tk121.95. This marks a notable rise from the Tk121.50 rate applied during two previous auctions on 13 and 15 July, where the central bank had bought $486 million. With this latest transaction, total dollar purchases through auctions now stand at $496 million.

A deputy managing director of a leading private bank said, "The central bank invited us to participate in the auction in the afternoon. By raising the auction rate, it has given the market an upward signal, which could result in further appreciation of the dollar tomorrow (Thursday)." 

He added that while previous auctions attracted high participation, fewer banks showed interest this time – limiting the central bank's ability to purchase beyond $10 million despite the higher rate.

Market dynamics and central bank's strategy

Mohammad Ali, managing director and CEO of Pubali Bank, welcomed Bangladesh Bank's dollar-buying policy. He told TBS that the amount of dollars banks sell to the central bank depends on their willingness. 

"The dollar price has increased slightly in the market over the past few days. Additionally, the market is somewhat tight right now as banks are trying to increase their import LC openings," he explained.

Ali commented that if dollar inflow increases next week, market liquidity would improve further. "The dollar market fluctuates every week. Even though the dollar rate has increased in the past few days, we don't think it will go out of control. The instability in the dollar market a couple of weeks ago is almost non-existent now. However, we need to observe the market for a little longer."

According to Bangladesh Bank data, yesterday's spot exchange rate in the dollar market was Tk121.94, and banks traded dollars among themselves in the interbank market at rates ranging from Tk121.60 to Tk122.02.

Another deputy managing director from a top private bank said, "On Wednesday, the dollar price already crossed Tk122 in the interbank market. This means it will increase further tomorrow (Thursday) following the central bank's upward signal."

He added, "Based on this speculation, most banks held onto their dollars rather than selling them to the central bank at a lower price. That's why the central bank only managed to get $10 million." 

The banker also pointed out that the central bank's purchase of nearly half a billion dollars from the market has also tightened banks' liquidity.

The Bangladesh Bank bought dollars in an auction for the first time in history on 13 July, following a drop of nearly Tk3 in the dollar price within a week. On that day, the central bank purchased $173 million at a rate of Tk121.50 through an auction. 

At the time, banks offered to sell dollars to the Bangladesh Bank at Tk120-Tk120.50, but the central bank bought them at a higher price, setting a floor price to signal an increase in the market rate.

Subsequently, on 15 July, the central bank bought another $313 million from banks at the same rate through another auction. Following these two consecutive auctions where dollars were purchased at higher rates, the dollar price began to rise. Yesterday, the dollar rate in the remittance and interbank market crossed Tk122. However, banks are charging up to Tk122.50 for import LC settlements.

Another central bank policymaker explained that when the Bangladesh Bank directly determined the dollar rate, it used to buy dollars from banks at a fixed rate. However, as per the conditions of a loan taken from the International Monetary Fund (IMF), a market-based exchange rate was introduced in mid-May. 

During the loan negotiations, the central bank assured the IMF that it would no longer directly intervene in the market as before, and if it needed to buy dollars from the market, it would do so at the prevailing market rate. Accordingly, the central bank is currently organising auctions to buy dollars from the market.