With the dollar value falling, it is time Egypt held reserves in other currencies, writes Ibrahim Nafie The past two weeks saw the US dollar fall sharply in front of other major currencies. The euro, at 1.32 to the dollar, is at its highest mark in 20 months. Sterling is at its highest rate to the dollar in 14 years. And the yen is at its highest rate to the dollar in three months. The dollar's fall is believed to be related to pessimism over the future of the US economy. Many analysts predict a slow in US growth rate to be followed by lower inflation and interest rates. The Federal Reserve is likely to bring interest rates on the dollar down in the near future, perhaps even at its coming meeting. Meanwhile high rates of growth in the EU, the UK and Japan are likely to push interest rates up, and make the corresponding currencies more attractive to portfolio investors. The above explanations make sense, and yet the drop in the exchange rate of the US dollar could be the outcome of a new US economic policy. The US may be moving on from the policy of a strong dollar to one of a weak dollar so as to alleviate its chronic trade deficit. Because the US is the largest economy in the world, and the US dollar is still the world's leading currency, a drop in the value of the dollar would affect everyone. For example, oil prices are cited in dollars. So a drop in the US dollar may bring about an automatic reduction in the price of oil to other countries with stronger currencies, such as Japan and Europe. In Arab countries, a depreciation of the dollar would decrease the total value of gas and oil exports, which is a large chunk of Arab exports (98 per cent in the case of Algeria and 85-95 per cent across the Gulf region). The same outcome is true for Egypt. The depreciation of the dollar caused the Egyptian pound to depreciate vis-à-vis the euro, sterling and yen. This gives our exporters a better chance to compete in world markets, but it also means that our imports cost more than before. This is why the government and the Central Bank of Egypt must reconsider the current exchange rate system. Is it in our interest to keep the dollar as the main peg of the Egyptian pound? Is it not time the Egyptian pound is linked to a basket of currencies weighed according to the size of our trade with the countries involved? Other countries are already diversifying their foreign reserves so as to give more weight to the euro and the yen. Perhaps it is time we do just that. Keeping one's reserves in one currency is like keeping one's eggs all in one basket.
