The Central Bank of Egypt intervened to save the dollar from its free-fall last week. Sherine Abdel-Razek reports on the reasons and repercussions of the move Investors in the US dollar shouldered heavy losses during the last six months through which the exchange rate to the Egyptian pound declined by five per cent to reach LE5.53. However, these losses peaked on the end of last week with a heavy selling spree pushing the price of the greenback to LE5.50, its lowest level since December 2004. While the dollar has been depreciating against major currencies worldwide for a while, especially in the last month after the US Federal Reserve Bank reduced the interest rate by 50 points, last week's decline had local reasons. Forex market observers and analysts cite statements by Minister of Finance Youssef Boutros Ghali as the main reason. Last Wednesday, Reuters News Agency quoted the minister, who was in Washington for the annual meetings of the International Monetary Fund and the World Bank, as saying he expects the dollar to decline by more than four per cent to LE5.30 by the end of the year. A couple of hours after the Reuters report was released a feverish selling spree of the dollar and a parallel buying of the Egyptian pound took the forex market by surprise. The unprecedented demand on the Egyptian pound lasted until noon Thursday. At that point, pushed by fears of a further decline in the dollar, and consequent adverse effect on local exports, the Central Bank of Egypt (CBE), intervened on through several commercial banks to buy over $800 million and totally change the scene. "Portfolio managers, foreign and local alike, know that the statements make sense and are supported by recent expectations of several international financial institutions like JP Morgan and Standard Chartered Bank that the American currency will be losing ground to the currencies of many emerging markets," said Amr Bahaa, head of treasury at Piraeus Bank. "With these statements coming from the finance minister himself, the only sensible move for them was to liquidate their holdings of the declining currency and buy the pound. "Bahaa explained. "In one hour the dollar gained two piastres and things returned back to normal" said Bahaa. He said that the intervention to stabilise the market was "a normal thing to do and it is one of the main uses of international reserves." He pointed out that a lot of central banks worldwide did the same recently to stabilise exchange rates and support exports. While supporting exports is a valid incentive, Reem Mansour, senior economist at HC Brokerage, stresses that with more than 40 per cent of Egypt's exports being directed to European countries, the effect of an increase in the value of the pound on exports is limited, especially that the price of exports are not the only criteria to attract importers. A comment released by EFG-Hermes seconds Mansour's opinion except when it comes to energy exports. "A high proportion of [exports to Europe] are energy related, and tend to be denominated in dollars," the comment said. "Often at prices agreed under long-term contracts, so there may be some adverse impact on the value of exports to Europe." Still, buffering exports is not the only reason for the intervention as seen by Bahaa. "With that unprecedented demand on the pound, the local liquidity would increase leading to a decline in interest rate, a factor that will worsen the country's already high inflation levels," he explained. Also, the problem with the unprecedented demand on the pound, according to Bahaa, is that it is created by foreign investors and do have a speculative nature. "These investors might sell the pound at any time and take their hot money back to their home countries causing a crash in the pound value." While the move saved the dollar and comes in line with the local "managed float" monetary policy, Mansour said she believes it will soon decline again. "If the market is left to forces of demand and supply, the real effective exchange rate of the dollar might even reach LE5." Moreover, experts believe that the change in interest rates both in the US and Egypt in the coming period will direct the exchange rate in favour of the pound. Analysts believed that the Federal Reserve Bank's meeting scheduled 31 October, as Al-Ahram Weekly was going to press, is expected to end up reducing the interest rate by a further 0.25 points to reach 4.75 per cent. Meanwhile, most analysts believe that the CBE's Monetary Policy meeting today would keep the local rates at the same level of 8.75 on overnight deposits and 10.75 on overnight loans, making the local currency much more investment appealing. However, later in the week on Sunday, in a handwritten statement sent to the Weekly by fax, the Ministry of Finance denied that Minister Boutros Ghali had made any statements concerning the dollar. The statement said, "the exchange rate was determined by the forces of supply and demand and could not be predicted." The dollar rate stabilised during the week around LE5.52-5.53.
