After months of global and local bust, the dollar is gaining ground, Sherine Abdel Razek reports on the reasons and repercussions of the change in fortune Greenback currency holders have had reason to rejoice through the past week with the dollar reversing direction and heading north against most of international currencies. Backed by a decline in commodity prices, a slow-down in Eurozone economies and an expected cut in interest rates in Europe, New Zealand and Australia, the dollar jumped to its highest level in six months against a basket of currencies on Tuesday. In Egypt, the dollar ended Monday transactions around LE5.43 amid heavy demand from investors, who just a couple of weeks ago no longer considered the dollar to be a good investment, when it touched LE5.28 level, its lowest since the flotation of the pound in 2003. The rally is expected to be sustained for some time by the sharp fall in oil prices as the US is a large importer of oil -- compared with fuel-efficient Europe -- and so it stands to gain the most when oil is cheaper. The price of oil has fallen about 24 per cent from a record high above $147 hit in mid-July. Moreover, Eurozone economies' exports to oil-rich countries are almost three times the value of US exports to these countries, which makes the former more vulnerable to any decline in the income of those countries. This came after months of consecutive declines in the value of the dollar as the subprime crisis stripped the American economy from a lot of strength and fears of recession pushed the Federal Reserve Bank to lower fed fund rate four times this year to end at two per cent. In addition to the international reasons the local rally had domestic reasons. Foreign investors fleeing the local capital market after it lost almost 25 per cent of its strength in four months bought a lot of dollars during the last two weeks to transfer investments back home. Foreigners sold LE1.34 billion worth of shares during the last week alone. Another factor that added pressure on the demand side of the dollar foreign exchange market is the seasonal increased demand to finance imports of food items needed for Ramadan like nuts and dried fruits. The increase is a correction and the rally will continue till it hovers around LE5.3 and stabilise there, according to Amr Bahaa, general manager of Piraeus Bank. He also believes that the rally will be short-lived as foreigners will return soon to buy in the market, as low prices render it attractive. The question that remains is how that strength might affect the appeal of local investors. A banker in a private sector bank who asked not to be named ruled out the possibility of the return of the dollarisation phenomenon of transferring deposits denominated in Egyptian pounds into dollars. "The deposit structure will not change, as even if the value of the dollar increases, the difference between the interest rate on Egyptian pounds denominated deposits and those on dollars is almost 10 per cent higher in favour of the former," he explained. The main federal funds rate, at which banks charge each other, has been kept at two per cent since June compared to 12 per cent in local inter-bank rates on deposits. While some insiders expressed fears that the growth in the value of the dollar would increase the burden on private sector companies borrowing from banks in dollars, the private sector banker saw it differently. According to Central Bank of Egypt (CBE) regulations, banks extend dollar credits to companies which get their income in dollars as well, thus no more burden is added. Due to the low cost of lending in dollars, bank credits to the private sector in dollars through the last five months increased by LE802 million to reach LE95.5 billion, compared to a decline of LE2.3 billion in the value of bank credit to the local private sector in Egyptian pounds. Bahaa noted that the problem with the dollar appreciation is that it inflates the import bill and adds to inflationary pressure. However, this can be dealt with. "If the exchange rate increased much, the CBE would intervene by withdrawing from the huge dollar- denominated foreign reserves it has to increase dollar liquidity in the market," Bahaa says. He also believes the local increase in the dollar rate is short-lived as foreign investors will enter the market again very soon, because it is attractively priced. "By then the supply of dollars would increase again, putting a lid on its price," he added.
