Stronger dollar could weaken Egyptian pound, say economists

Sherine El Madany
5 Min Read

CAIRO: Economists expect the US dollar’s month-long rally against the Egyptian pound to remain intact, as Europe appears to be slipping closer towards recession.

“We think that the pound will weaken against the US dollar over the next 12 months based on expectations that the dollar will get stronger against the euro and the sterling, said Simon Kitchen, senior economist at EFG-Hermes.

Egyptian investment bank EFG-Hermes forecast on Thursday that the Egyptian authorities would allow the Egyptian pound to fall to LE 5.40 against the dollar by the end of 2008 and to LE 5.55 by June 2009.

After months of appreciating against the dollar, the Egyptian pound peaked at LE 5.30 on Aug. 7 but has since slipped back to LE 5.374.

“This recent slippage in the pound-dollar rate is not due to internal factors but rather to global factors that strengthened the dollar against the euro, said Alia Mamdouh, economist at CIBC brokerage firm.

Globally, a blistering rally in the dollar since late July has set the greenback on track for its best monthly performance against a basket of six major currencies in nearly 16 years. Last week, the dollar posted its biggest monthly advance against the euro since the European currency’s 1999 debut.

On Monday, the sterling slipped to its lowest level against the dollar in more than two years after the UK’s finance minister said the country’s economic downturn might be the worst in 60 years.

Closer to home, EFG’s Kitchen said the US dollar’s rally against the euro is currently feeding the Egyptian pound against the euro as well. “If you look at the pound against other currencies [euro and sterling], it continues to get stronger. This is beneficial for inflation on the medium term, he said.

“These are the currencies of Egypt’s main trade partners in Europe . and on a trade-weighted basis, when the pound gets stronger, imports from Europe get less expensive.

EFG-Hermes said the aim in Egypt now was to reduce the impact of euro and sterling weakness on export competitiveness. “Maintaining GDP growth above 6 percent means Egyptian pound exports must stay competitive in EU markets, it noted.

The bank estimated that without the recent slippage in the pound-dollar rate, the value of the euro would have fallen to LE 7.75 in August. It now stands at LE 7.90, way below July’s rates at more than LE 8.4.

“The reference currency for a lot of people in Egypt is still the dollar, so a lot of people still [consider] the pound-dollar rate. But in trade, the euro is more important than the dollar because 40 percent of Egyptian exports is with Europe and 50 percent of tourist arrivals is from Europe, Kitchen clarified.

Several economists previously predicted that Egyptian authorities would permit the pound to appreciate against the dollar to combat soaring inflation rates, currently rising to a 16-year record high of 22 percent in the year to July. Egypt’s central bank has 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, Mohamed Abu Basha, economist at EFG-Hermes, previously told Daily News Egypt.

“All [economic] indicators point that there is room for pound appreciation against the dollar, he said back then 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 mid-August that it expects the pound to underpin against the dollar to reach LE 5.16 by year-end.

However, both investment banks changed views this month. “We previously expected the pound would appreciate against the dollar because of inflationary pressures. But now, our views changed a bit; and we expect the pound to slip between LE 5.2 and 5.4 against the dollar by year-end, said Mamdouh, explaining that the dollar’s recent rebound against the euro bolstered the dollar against the Egyptian pound.

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