CAIRO: The value of the US dollar depreciated this week against the Egyptian pound after fears about the deteriorating health of the two largest US mortgage finance companies.
The dollar was knocked down to a five-year low.
The greenback slid 1.5 piasters on Sunday to reach a bidding price of LE 5.3048 and an asking price of LE 5.3326, posting its single-day decline since beginning of the year.
The US mortgage lending glut and the subprime credit crisis have rattled the dollar globally. Investors jittered about the stability of two US mortgage finance giants that could unleash massive turmoil in the world’s battered financial markets and inflict a deep recession on the US, which would in turn chill growth everywhere.
Mortgage failures soared last week as the latest chapter in the infamous US housing finance crisis that began more than a year ago continued. Embattled mortgage finance houses Freddie Mac and Fannie Mae risked heading for a steep downturn.
Both lenders own or guarantee $5 trillion of debt, close to half the value of all US mortgages.
This latest in the credit crisis slammed the dollar worldwide starting Friday, as persistent worries about the stability of two US mortgage finance giants were seen constraining the Federal Reserve’s ability to raise interest rates this year.
The euro vaulted to $1.5946, the highest since April 23, according to Reuters data. It traded at around $1.5932, up 0.9 percent on the day. The dollar also dropped as low as 106.21 Japanese yen, down 0.8 percent.
Closer to home, the dollar echoed its negative worldwide performance, sinking to its lowest levels since floating of the Egyptian currency February 2003.
Still, the dollar’s steep decline domestically is not only due to worsening health of Freddie and Fannie. “This decline is natural because over the last three years, there existed a surplus in the balance of payments that [spurred] foreign currency, explained Magdy Sobhy, senior economist at Al-Ahram Center for Strategic Studies.
“This surplus was due to three factors: An upsurge in Egypt’s exports of oil and gas, Suez Canal soaring revenues, and a growth in tourism which all generate foreign currency into the country, he added. “This led to a surplus of reserves in US dollars.
Based on Egypt’s Central Bank records, foreign currency reserves hiked to $34.59 billion end of June, up from the previous $34.10 billion. This increase translates into an oversupply of US dollar on the domestic market, Sobhy pointed out.
“This is the highest level in foreign currency reserves in five years. This figure suffices for nine years of imports, which is quite high. Usually, six years are enough, and that is why some voices are calling to use this reserve in other things.
Talk that the CBE overbought in US dollar to avoid any Egyptian pound depreciation might have also triggered a domestic oversupply in the greenback, however, Sobhy could not confirm the news.
An ongoing appreciation in the value of the Egyptian pound against the US dollar bears a downside effect on Egyptian exports in non-US markets. “Prices of exports will increase in markets that do not trade in US dollars, Sobhy said.
“In European markets, for instance, prices of Egyptian exports will rise vis-à-vis other countries that trade in currencies other than the dollar, which will have an adverse effect on our exports, he added.
Reserves in US dollars, he added, can also be a burden on dollar-denominated Egyptian securities, as returns will fall.
On the other hand, steep falls in the US dollar have spurred other foreign currencies on the domestic market, with the euro trading at LE 8.44 (up from LE 8.35) and the Sterling at LE 10.55 (up from LE 10.50).
