Dollar's rally against pound short-lived, say analysts

Sherine El Madany
7 Min Read

CAIRO: As the US dollar recently rallied against the Egyptian pound and other major currencies, economists expect the greenback to take a breather and slip again against the pound.

After struggling for almost a year, the dollar strengthened this week. On Monday, the dollar jumped to its highest in a month against the Egyptian pound to LE 5.324. By press time on Tuesday, the dollar renewed its rally to reach LE 5.331.

Last July, the greenback was knocked down to a five-year low. On July 14, the dollar posted its worst single-day decline since beginning of the year, sinking to LE 5.29, its lowest levels since floating of the Egyptian currency February 2003.

Behind this week’s surge is stalling economies across Europe rather than a weakness in the Egyptian pound, experts explained. “This dollar renaissance is a reflection of a leap in the dollar worldwide and does not indicate a weaker pound, said Mohamed Abu Basha, an economist at EFG-Hermes.

Internationally, the dollar extended its rally on Tuesday and lifted to its highest for the year against a basket of currencies by another dip in commodities’ prices and ongoing worries about slowing global economic growth.

“News that the euro zone economy is slowing faster than expected and the latest dip in commodity prices (gold, oil, and metals) have boosted the dollar a little bit, Abu Basha explained.

As investors bailed out of bets that Europe and the global economy could withstand the US downturn and credit crisis, the euro plunged Monday nearly 6 percent against the dollar in just two weeks, Reuters reported.

“The strength in the dollar index has little to do with dollar strength but more the weakness of the other currencies, Reuters quoted Michael Klawitter, senior currency strategist at Dresdner Kleinwort in Frankfurt.

On Tuesday morning, the euro was down 0.3 percent on the day at $1.4650, having earlier in the global session hit a six-month low of $1.4631, according to Reuters data.

The dollar index – which measures the dollar’s value against a basket of six currencies – rose 0.3 percent to 77.293.

Data released last week show the euro zone economy contracted 0.2 percent in the second quarter, the first decline since before the euro’s introduction in 1999. “The expectations for Europe have worsened and that’s better news for the dollar, David Wyss, chief economist at Standard & Poor’s, told the Wall Street Journal on Monday.

Falling oil prices – with oil slipping below $112 a barrel – have helped the dollar too, since softer energy costs reduce inflationary pressures.

Closer to home, an almost four-month tumble in the stock exchange has also fed the dollar against the local currency. The relentless slump in the Egyptian stock exchange has pulled a substantial amount of the greenback out of the market, Abu Basha pointed out.

“For almost two consecutive weeks now, foreigners have been net sellers on the Egyptian bourse, he added.

Still, economists foresee the current rebound in the value of the dollar against the pound short-lived, since the government is pushing for a stronger currency to curb record-high inflationary pressures that topped 20 percent this month.

Abu Basha expects the Egyptian pound to make a quick comeback against the dollar, explaining that local currency appreciation is the government’s winning card against inflation.

“At EFG-Hermes, we are fully convinced that pound appreciation is the best way to combat inflation and not raising interest rates, he said. “It is more effective.

The Central Bank of Egypt, he added, has raised interest rates five times this year, however, the effect on inflation is still not visible. “Because in Egypt, we mostly have imported inflation from global energy and food price surges.

The CBE raised rates by a total of 2.25 percentage points this year as rising prices emerged as a tough challenge for the government, which increased fuel prices in May to help finance pay raises for public sector employees.

“This 2.25 percentage points are not enough to absorb the high liquidity in the market. Therefore, the pound appreciation against the dollar is a working solution, Abu Basha clarified.

“All [economic] indicators point that there is room for pound appreciation against the dollar, he said adding that he expects the pound to hit LE 5.2 against the dollar.

Similarly, CIBC Brokerage firm noted in its economic report on Egypt released this week that it expects the pound to underpin against the dollar to reach LE 5.16 by year-end.

As for inflation rates, the firm sees persistent inflationary pressure until year-end to record an annual rate of 20.3 percent before slightly easing off in the first quarter of 2009. Furthermore, CIBC noted the central bank could raise interest rates for the sixth time next September by 50 basis points.

“Inflation could slowdown a bit in 2009, but it will still remain high, EFG’s Abu Basha reiterated. “It will remain in double digits [for the entire year].

As for the dollar, the next main focus for investors worldwide will be the July building permits and housing starts data in the US – to be released Tuesday afternoon – which analysts said could spark some dollar selling, at least in the short-term, and thus halt the greenback’s 11-day advance.

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