UPDATE 3-Pakistani rupee sheds 2.6 pct, hits record closing low

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KARACHI, July 8 (Reuters) - The Pakistani rupee slumped 2.6 percent on Tuesday to close at a record low in a market worried about high inflation, burgeoning deficits and security.

The currency closed at 72.85/90 to the dollar PKR=PK after falling as low as 73.04 rupees, when dealers suspected the central bank intervened to stop the rot.

A new civilian-led coalition government, sworn in over three months ago, has sought help from multi-lateral lenders and friendly governments to stave off the economic threats as the country tries to cope with soaring import costs.

Any news that loans had been approved could provide some relief to the rupee. Foreign currency reserves have dwindled to levels equivalent to less than three months worth of imports as the central bank sold dollars to help oil importers make payments.

There was also market speculation that the State Bank of Pakistan would raise interest rates in a policy review later this month to try to bring rising prices under control, dealers said.

"Fixing the problem is not easy since inflation is globally driven and for Pakistan it's also a structural issue as it does not have a lot of exports," said Matthew Wilson, an analyst at Morgan Stanley.

The rupee has fallen 18.3 percent against the dollar this year as annual inflation has accelerated to a three-decade high above 19 percent and fiscal and current account deficits have widened, due largely to a soaring oil import bill.

"When the fundamentals are not strong enough, how will the rupee strengthen? It's not easy and outlook is quite bleak," said a currency dealer.

Dealers said the weakest the rupee traded at on Tuesday was 73.04 rupees. It closed at 71.00/05 on Monday.

They said a suicide attack in Islamabad on Sunday and six small blasts in Karachi on Monday had no direct impact on trade but compounded worries about the overall investment climate.

Trading dried up in the stock market after authorities took aggressive action on June 24 to halt a steep fall. Daily limits were revised to allow the market to rise 10 percent but fall just 1 percent. A temporary ban on short selling was introduced.

RATE RISE TO COME?

The rupee is now well beyond levels in late May when a precipitous fall prompted the central bank to take steps, including raising the key discount rate to 12 percent from 10.5 percent, to stabilise the currency and dampen speculation.

Foreign currency reserves have fallen to $11.3 billion from a record $16 billion last October. Official figures show that $1.42 billion of foreign reserves was used to cover the oil import bill in May. The monthly average between February and May was $1.27 billion.

In a presentation to President Pervez Musharraf on Saturday, the central bank governor said rising international fuel and commodity prices had considerably increased pressure on the balance of payments, fiscal accounts and inflation.

In what analysts said could be a hint of further tightening, bank governor Shamshad Akhtar said a number of developing and developed countries were pursuing tight monetary policies to contain inflation and to mitigate its impact on long-term growth.

Analysts fear political infighting is distracting the coalition's attention from restoring economic stability, though a budget announced last month set targets to bring down an unsustainable fiscal deficit. (Reporting by Sahar Ahmed; editing by Simon Cameron-Moore and Neil Fullick)