Interbank Dollar Trading Exceeds $200 Million in a Day, Highest in Five Years

Dollar trading in Bangladesh's interbank foreign exchange market has recorded a significant surge, with commercial banks trading more than $205 million on Thursday (October 8). According to Bangladesh Bank officials and industry bankers, this marked the highest single-day interbank dollar trading volume in the past five years.

Bangladesh Bank data showed that interbank dollar transactions totalled $101 million on October 7 and $82 million on October 6. The figures indicate a substantial increase in dollar trading activity within just a few days.

Higher Dollar Supply Amid Relatively Weak Demand

According to banking officials, the supply of US dollars in the foreign exchange market currently exceeds demand. Continued foreign currency inflows from remittances and export earnings have resulted in surplus dollar holdings at several commercial banks.

Meanwhile, some banks continue to require dollars to settle import bills and meet other foreign payment obligations. Consequently, banks with surplus dollar holdings are selling them in the interbank market, while those facing foreign currency requirements are purchasing dollars.

The Net Open Position (NOP) is an important indicator in banks' foreign exchange risk management. It broadly measures a bank's net exposure to foreign currencies, taking into account its foreign currency assets and liabilities. Banks must maintain their NOPs within the limits prescribed by the regulatory authorities.

When a bank's NOP approaches the maximum permitted limit, it may need to sell excess foreign currency to reduce its exposure. Several banks have recently faced this situation, contributing to an increase in dollar supply in the interbank market.

Preparations for Government Payments Boost Trading Activity

Banking sector officials said several government-related foreign currency payments are scheduled for this month. Banks responsible for processing these payments have been purchasing dollars in advance to meet their upcoming obligations.

At the same time, concerns that remittance inflows could decline in the coming weeks compared with September have prompted some banks to increase their dollar holdings. They are purchasing the necessary foreign currency from the interbank market to ensure that future international payments can be settled without disruption.

Meanwhile, Bangladesh Bank has recently suspended its regular dollar purchases from commercial banks. As a result, banks holding surplus foreign currency are increasingly relying on the interbank market to sell their excess dollars, according to banking officials.

Interbank Foreign Exchange Market Gains Momentum

The interbank market is a financial system in which commercial banks directly trade foreign currencies, short-term funds and other financial instruments among themselves. Individual customers and businesses cannot participate directly in this market.

According to market participants, trading activity and effective price discovery in the interbank foreign exchange market had remained limited for an extended period. However, the recent increase in dollar transactions between commercial banks indicates that the market is gradually becoming more active.

September Remittances Stand at $2.76 Billion

According to Bangladesh Bank data, Bangladesh received $2.76 billion in remittances in September, the lowest monthly inflow in the preceding 11 months.

However, remittance inflows recorded positive growth during the first two months of the current fiscal year. The country received a total of $5.83 billion in remittances during July and August, representing an increase of nearly 20 per cent compared with the corresponding period of the previous fiscal year.

This growth in remittance earnings also contributed to a substantial improvement in the country's current account surplus. Bangladesh Bank figures showed that the surplus reached $599 million during the July–August period, compared with $197 million in the same period of the previous fiscal year.

This means the current account surplus nearly tripled year on year.

Central Bank's Role in Stabilising the Dollar Market

In September this year, Bangladesh Bank purchased $50 million from commercial banks through an auction after a gap of nearly three months, as the US dollar's exchange rate began to decline in the domestic foreign exchange market.

Generally, when dollar supply increases and downward pressure emerges on the exchange rate, the central bank may purchase dollars to absorb part of the excess supply from the market.

According to economists, an efficient interbank foreign exchange market can play a crucial role in ensuring the effective distribution of foreign currency, facilitating exchange rate determination and strengthening liquidity management across the banking sector.

If the recent upward trend in trading activity continues, it could create opportunities for greater cooperation among commercial banks and further strengthen market-based foreign exchange transactions in Bangladesh.