CAIRO: A recent rally in the Egyptian pound against the US Dollar may unwind as economists said the greenback’s slump this week may have been overdone.
On Sunday, the Egyptian pound appreciated to 5.5162 against the dollar by press time from Thursday’s closing weighted average of 5.5199. The figure compares to a rate of 5.52, almost steady over the last two weeks.
“The pound slipped two weeks ago to 5.58 against the dollar but later rebounded to a range of 5.51/2, said Magdy Sobhi, senior economist at Al Ahram Center for Strategic Studies.
“The current rally is mainly triggered by a falling dollar against all major currencies, particularly the euro and the yen, he added.
On Thursday, the greenback hit more than a two-month low against the euro and held close to a 13-year low versus the yen after the US central bank cut interest rates to near zero and pledged for more quantitative easing.
The euro rose to a high of $1.4719, gaining eight percent against the dollar this week, on track for its biggest weekly gain ever since its introduction in 1999. The dollar stood at 87.85 yen, after falling as low as 87.11 yen on Wednesday, the lowest level since 1995.
“The Fed’s rate cut slammed the US dollar against major currencies, and it naturally reflected on the Egyptian pound, pointed out Mohamed El-Abiad, head of exchange rate committee at the Federation of Commerce.
Last week, the Federal Reserve cut its benchmark interest rates to a record low, further diminishing the appeal of the greenback.
The Fed cut its federal funds rate target to a range of zero to 0.25 percent from the previous target of 1.0 percent and said it would use “all available tools to dispel a year-long recession.
Financial markets had expected the Fed to lower rates by no more than three-quarters of a point. “This is a historic low cut. It means that dollar deposit rate will not exceed 0.5 percent, which compares to some 10.5 percent rate for the Egyptian pound, Sobhi explained.
“In turn, demand diminished on the dollar.
Still, several economists expect the greenback to make a comeback against the Egyptian pound on fears that a deepening global recession would thwart Egyptian exports.
“The current pound rally is not indicative of [a long-term] trend, pointed out Alia Mamdouh, economist at CIBC brokerage firm, expecting the pound to lose ground against the dollar on the back of exports promotion.
“Exports have already been hit by the global slowdown in Europe and the US, and a further appreciation in the pound would diminish demand, she added.
Trade Minister Rachid Mohamed Rachid recently said that Egyptian exports would fall in the current 2008/09 fiscal year compared to a year earlier, as economic recession threatens markets in Europe and the United States without revealing specific figures.
He said Egyptian exports grow 20 percent to 25 percent in the current fiscal year, which compares to 30 percent last year.
Mamdouh expects the US dollar to underpin to LE 5.73 by the end of fiscal year 2008/09 up from LE 5.50 in the previous year.
Simon Kitchen, senior economist at investment bank EFG-Hermes, forecasts a sharper depreciation in the local against the US dollar over the next 12 months to LE 6.20, posting a depreciation of 11 percent.
“Inflation risks are subsiding and the government’s focus is shifting to growth, and we expect a policy preference for [the pound] weakness to manifest itself over the next 12 months, he said. “The authorities’ priority will be keeping exports competitive even as external demand falters.
Analysts said that a possible rally in the dollar against the pound would not toll heavily on inflation rates in Egypt. “I don’t think inflation rates will rebound even if dollar goes up because prices of oil and foodstuffs are falling globally, Mamdouh said.
Oil fell below $34 on Friday to its lowest level in 4 and a half years as the global economic slowdown overshadowed OPEC’s record supply cuts.
“Costs of imported commodities have recently fallen by 50-60 percent. However, that rate have not yet reflected on local prices, said Sobhi. “A devaluation in local currency will not heavily weigh on inflation rates because local prices are still more expensive than global ones.
Annual inflation in urban parts of the Arab country slid to 20.3 percent in the year to November after peaking to 23.6 percent August.
Central Bank Governor Farouk El-Okdah said Sunday all central bank forecasts show that inflation would drop to between 10 to 12 percent in June, roughly in line with market expectations.
Okdah said in October that monetary policy would act to support economic growth in the face of global markets turmoil, but reiterated later that his overriding objective remained price stability.
“The central bank’s main goal is to support economic growth, but it has given a priority to combating inflation because inflation at 20 percent is still a high rate, Sobhi explained.
Okdah’s remarks that the central bank would ease rates only at the right time, raised expectations it may leave key overnight interest rates unchanged this week.
“Inflation rates are still high.and the bank has to maintain its rates, Sobhi said.
As for the dollar, El-Abiad said that powers of supply and demand will be main factors governing Egypt’s exchange rate over the coming period. “Currently, there is a balance between supply and demand. If this trend continues, the dollar could remain steady or even depreciate [over the short-term] as fears of global recession erode demand.