The Egyptian pound has experienced noticeable fluctuations against the US dollar in recent days, reflecting a combination of domestic and global factors, particularly the following six:
First: Revenues have improved, but financing needs have grown even faster
The issue cannot be measured solely by the volume of incoming flows. It must also take into account accumulated demand and outstanding obligations.
Regional and international geopolitical tensions since the end of last February have prompted widespread precautionary pricing and increased immediate demand for foreign currency among importers and businesses seeking to secure inventories and meet their requirements.
Under a flexible exchange rate regime, upward and downward movements in the exchange rate reflect the balance between supply and demand.
Improved inflows have faced substantial pressure from external debt repayments, profit repatriation by foreign investors, and the need to cover import requirements, alongside the effects of imported inflation and rising global prices for strategic commodities.
The Central Bank of Egypt’s figures for FY2025/2026 show that remittances reached $47.3bn and tourism revenues totalled $18.4bn. Nevertheless, the current account deficit widened from $15.4bn to $22.5bn.
This provides the most important explanation for the apparent contradiction: improvements in major sources of foreign currency did not prevent the gap between current receipts and payments from widening.
The overall balance of payments surplus of $2.8bn was achieved with support from financing and investment flows.
These figures, covering the period to June, provide background to one of the main reasons for the dollar’s appreciation: increased demand for foreign currency to finance imports. However, they do not, on their own, establish the cause of October’s exchange rate movements.
Second: Demand for dollars may increase as production itself recovers
Not all increases in imports represent consumption.
Intermediate goods accounted for 55.2% of the increase in non-oil imports, while petroleum imports rose to $24.9bn.
Maintaining production requires dollars today, even though that production may generate exports or replace imports later.
Growth in economic activity can therefore place temporary pressure on the currency, particularly when foreign currency returns take longer to materialise.
The key is to ensure that these imports translate into productive capacity capable of narrowing the foreign currency gap in the future.
Third: Some accounting inflows do not represent new dollars entering the market
For example, the $18bn in foreign direct investment includes $6.2bn in reinvested earnings.
These earnings are recorded in the accounts as income attributable to foreign investors and then as reinvestment. They do not, in themselves, represent a new cash transfer from abroad.
Similarly, it would be incorrect to treat all investment income payments as actual cash outflows, because they include the corresponding accounting entry.
Both inflows and outflows therefore need to be adjusted to distinguish accounting transactions from actual cash movements before assessing exchange rate pressures.
Fourth: The exchange rate is influenced by the timing of supply and demand, as well as the repricing of future expectations
If an importer expects costs to rise, they may bring forward their purchases.
If an exporter expects the dollar to appreciate, they may delay selling foreign currency to the extent permitted.
This can intensify pressure on the exchange rate without a corresponding increase in annual foreign currency requirements.
Fifth: The Egyptian pound’s exchange rate is also affected by the strength of the US dollar globally
On 12 October, the dollar reached its highest level in 18 months.
It is therefore necessary to assess the pound’s performance against a basket of currencies to distinguish domestic currency weakness from the global strength of the dollar.
Sixth: The risks associated with rising US interest rates
This risk is no longer entirely theoretical.
The US Federal Reserve raised its target interest rate range to 3.75-4% in September. Following US inflation data, expectations of another increase strengthened.
The effects of such an increase are transmitted to the Egyptian economy through four channels:
External financing: The cost of floating-rate loans increases when interest rates are reset, as do the costs of new borrowing and refinancing. Existing fixed-rate debt, however, does not automatically become more expensive.
The attractiveness of investments denominated in Egyptian pounds: Higher returns on safe dollar-denominated assets increase the returns investors demand to compensate for Egypt’s country and exchange-rate risks.
Dollar strength: Expectations of tighter US monetary policy may support the dollar even before a rate decision is announced.
Capital flows: As US interest rates rise, some short-term speculative capital, often referred to as hot money, may leave the market, creating pressure on the pound.
An investor may retain an existing position while reducing new investments or reassessing hedging arrangements.
In that case, the additional supply of dollars weakens, even if net capital inflows remain positive.
Higher oil prices could also fuel US inflation and prolong monetary tightening, leaving Egypt facing both a larger import bill and more restrictive financing conditions.
The decisive indicator is whether the dollar rises while foreign currency remains available and transactions continue to be executed promptly.
Thankfully, the current temporary appreciation of the dollar has not been accompanied by unfulfilled foreign currency requests or a shortage of dollar liquidity in banks.
Outlook
The combined effect of these factors makes continued pressure on the Egyptian pound more likely, although it does not determine the speed or extent of any depreciation.
A moderation in oil prices, alongside a decline in expectations of further US interest rate increases, could ease that pressure quickly, even before improvements appear in annual foreign currency inflow figures.
Ultimately, I would emphasise that the market prices in not only the dollars that have already entered the economy, but also the dollars we will need in the future and the cost we will have to pay to obtain them.
Mohamed Abdel Aal, banking expert
