The pound is inching downwards in value, Niveen Wahish explores why Two weeks ago, one of the country's dailies erroneously published that the Egyptian pound was trading at LE5.8 to the United States dollar, and what started off as a mistake turned out to be a premonition. Fifteen days later, the dollar is on its way to that LE5.8 benchmark. After having traded for months in the range of LE5.68 to LE5.7, it suddenly jumped by around LE0.05 to LE5.75. It even hit LE5.77 on Thursday, its weakest point in over three years. What is behind the sudden drop? Nobody seems to be able to point one specific cause. One banker who preferred to remain anonymous described the phenomenon as a domino effect. He said an initially slight drop in the pound's value triggered foreign investors to sell their Egyptian treasury bill possessions, exchange their value into dollars and exit the market for fear of losing the worth of their original investment. In turn, that move caused the pound to drop further. The banker explained that Egyptian treasury bills, or T-Bills, attract foreign investors because they yield between nine and 10 per cent. Meanwhile, another factor influencing increased demand on dollar purchases could be the upcoming elections. "In times of uncertainty, investors usually pull out," the banker said. Holders of the greenback are expecting it to climb further against the pound. Mohamed El-Abyad, head of the Foreign Exchange Division at the Egyptian Federation of Chambers of Commerce, says that despite the higher rate, nobody is eager to sell their dollars to the extent that exchange companies have had to cover their needs from banks. The banker added that the Central Bank of Egypt (CBE) seems to welcome the slide in the Egyptian pound's value, and is not interfering in any way to stop this decline. A less valuable Egyptian pound is good business for exporters and tourism. However as a CI Capital note points out; "imports will become more expensive- destablising the somewhat cooling inflationary pressures." But to Mohamed Rahmy, research analyst at Beltone Financial, "a stable pound to the dollar rate will remain a CBE priority, and any fluctuation in the value of the pound is likely to be a short-lived trend and will stay within a narrow band." Rahmy attributed current fluctuations to "exogenous factors". What economists look at, he said, are the fundamentals that drive the Egyptian pound on the whole, rather than short-term trends. He added that in terms of supply, the main hard currency earners, including the Suez Canal, tourism and foreign remittances, have been stable and recovering at a satisfactory pace from the lows they reached last year. In September, Suez Canal revenues totalled $410.2 million compared to $382.5 million in September last year. Tourism receipts, Egypt's minister of tourism told Bloomberg, are expected to reach around $13 billion, up from around $11 billion in 2009. On the demand side, said Rahmy, imports have been gaining some momentum lately after having fallen in the wake of the financial crisis, as a result of a pick-up in domestic demand. Nonetheless, imports' growth have not reached a level that is strong enough to create pressure on the exchange rate and cause a foreign exchange shortage as economic growth continues to gain ground, Rahmy added. CI Capital Research Director Mona Mansour also believes this depreciation is short-lived. She says the pound witnessed a similar depreciation in March 2009, when the US announced its plans for quantitative easing (QE) in the aftermath of the global financial crisis. At that time the dollar reached the LE5.7 benchmark. "Now we are witnessing a similar circumstance with another quantitative easing in the horizon," said Mansour. The US Federal Reserve is expected to unveil its second QE during its meeting early November. QE is a process by which the central bank buys assets such as government and corporate bonds, using money it has printed. The institutions selling those assets will then have "new" money in their accounts, which then boosts the money supply. The central bank reverts to this technique when traditional methods such as lowering interest rates fail to boost money supply. Mansour explained that last year QE caused investors to flee the US market seeking emerging markets, including Egypt, in search for higher interest rates. That in turn led to an influx of dollars into the market thus helping the pound appreciate once more. She expects the same to happen this time around noting that "this depreciation should be short-term, possibly lasting for another month." In all, it appears that the relationship between the pound and the dollar flows against the global tide. Globally, the dollar has been dropping against the euro and has lately hovered around $1.4 per euro, up from around $1.2 in the summer. The banker who spoke to Al-Ahram Weekly on condition of anonymity explained that the value of the Egyptian pound to the dollar is largely dependent on local supply and demand often regardless of the dollar's global value.
