After last week's dollar retreat, a wait-and-see attitude prevailed in the foreign exchange market throughout the week. Sherine Abdel-Razekreports The excitement that stemmed from the retreat in the dollar rates in the black market last week proved to be short- lived. Although the dollar did not surpass the LE6.80 mark, it also failed to further narrow the gap with the official rate. After nose diving to LE6.60 in the black market at the end of last week, the dollar surged again earlier this week to hover around LE6.75-6.80 as the supply of dollars tightened. Still, this level is a vast improvement from the LE7.30 the dollar briefly reached in late September. "People are waiting to see the market direction. It is still psychologically driven as the rapid increase in the dollar rate during the last year gave its holders the impression that they could not lose by hoarding dollars, even if it lost ground for a short while," said a forex dealer who preferred to remain anonymous. Last week witnessed a relative increase in the supply of dollars as the dollar lost almost one pound of its value in less than three days. According to media reports, this was precipitated by an injection of dollars into the banking system by the Central Bank of Egypt. While the veracity of both the value of the decline and the CBE intervention are dubious, the reports succeeded in pushing some people to sell off their dollars. "The increase in supply of last week was triggered by people with small sums of dollars selling them for fear of a further decline. Meanwhile, those with large sums, or in other words those who will move the market, are holding back to see if the government will fulfil its promise to inject more dollars into the market or not," the forex dealer said. The government released statements by the end of last week saying that it will inject up to $400 million to cover all the short dollar positions in the banking sector. This was followed by Prime Minister Atef Ebeid meeting with the board of the Federation of Egyptian Banks to discuss the possibility of changing the short-term interest rate to increase the investment appeal of the Egyptian pound and support its struggling position against the dollar. The government promised to cover all the daily needs of banks to open letters of credit. The meeting concluded with a decision to reinforce inter-bank dollar transactions, according to which banks will be able to borrow dollars from each other to cover their immediate needs, starting this week. The prime minister also emphasised the importance of applying the notorious Decree 506, according to which exporters and tourist companies must relinquish 75 per cent of their dollar revenues to banks at the official rate, currently LE6.13. But are such decisions enough? "Things will start to fall into balance only when the government injects more money in the market," said Mohamed El-Abiad, head of the forex division in the Egyptian Federation of the Chambers of Commerce. He said that what happened last week only covered negative positions in certain banks with an overall value not exceeding $55 million. "We need to see a much more sustainable revival in the pound value." El-Abiad expressed the fear that if more dollars are not injected in the market in the near future, the rate will increase due to the demand for foreign currency during the Omra and Hajj seasons of religious pilgrimage. The forex dealer said that the divergence between the official rates in banks and exchange bureaus and the parallel black market makes the problem persistent. "We were told that the floatation is leaving the market to be ruled by supply and demand forces, but being forced to deal with the static official rate of LE6.13 totally contradicts with this aim." Amr Bahaa, head of the treasury department in the Egyptian Commercial Bank, interprets government policy differently. "Yes, this price is not indicative of the real supply and demand, but the official rate cannot be expected to match the over-priced non- official rate, which is based on wild speculation." He said that by calculating the weighted average of the official transactions, the government is protecting the interest of those with limited incomes, as any increase in the rate will eventually be translated into a hike in the prices of local commodities.
