Egyptian currency deposits were given a boost after a cut down in dollar interest rate Sherine Abdel-Razek reports Depositors in local banks with dollar cash holdings or dollar denominated deposits shouldered high losses last week. The nose dive was a natural outcome of the US Federal Reserve's move to cut interest rates by 50 points to 4.75 per cent -- the first in four years and the largest since 2002. Local banks reduced the interest rates they pay on dollar deposits with different maturities. While the reduction in some banks was similar to that of the Federal Reserve at 0.5 per cent, others cut less than that out of fear of losing clients. The retreat in dollar yields has encouraged many investors to sell their holdings in this currency, stirring an oversupply in the foreign exchange market in both the Forex Bureaux and banks. Consequently, the dollar exchange rate declined to LE5.62, its lowest in two and a half years. In fact, after the move the dollar fell against all major currencies worldwide, dropping to an all-time low against the euro. The reduction came as a disguised blessing for deposits in Egyptian pounds, especially after the Central Bank of Egypt (CBE)'s Monetary Policy Committee decided last week to keep its overnight deposit and lending rates at 8.75 per cent and 10.75 per cent, respectively. This widens the gap between dollar denominated deposits and those in local currency to four per cent, and gives Egyptian currency deposits a boost. "We will see more investors converting their deposits into the local currency," asserted Mohamed Fahmi, head of research at Prime Securities. Another benefit of the retreat in dollar yield was felt at the capital market which has now become a more lucrative investment alternative. The market's main index, CASE30, recorded an all-time high in last week's transactions with foreigners, now enjoying cheaper money, heavily buying in the market. Purchases by foreigners during the week amounted to LE2.2 billion, while their selling orders came at LE1.8 billion. The depreciation in the US currency will have a mild negative effect on Egyptian exports, and thus the balance of trade. This will be offset by an expected cut in overnight rates soon, stated Fahmi. "Provided that inflation stays under control, the CBE should cut overnight rates soon because it is not economically feasible to keep such a wide difference between rates between deposits in Egyptian pounds and those in dollars," he explained.
