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DOLLAR DOLDRUMS
Finance Minister Youssef Boutros-Ghali may not quite have the same cult status as the “Great Greenspan” once did, but it has become clear just how weighty his words can be. The entire economy seems to hang on his lips. A slip up, a misquote or a misplaced decimal... and suddenly the country is either awash in greenbacks, or haemorraging hard currency.
Last month, state-run weekly Al Musawwar magazine quoted Boutros-Ghali as saying that he expected the US dollar, which has already taken a pummeling, to drop a further 4 percent against the Egyptian pound to settle at around LE 5.30 per dollar by the end of 2007. It was a time bomb.
When foreign buyers got wind of the “YBG forecast” they began snapping up Egyptian currency so fast the dollar shed 200 points in a single morning to reach 5.5 pounds to the dollar. Or at least that’s the way it was presented in press reports. (I’m more inclined to believe the buying frenzy was tied to the coinciding release of a spate of sour economic reports about the US economy.)
In any case, Boutros-Ghali has vehemently denied making any claims about the future of the pound’s exchange rate. He’s also made clear that he does not, directly at least, control its fate. The forces of supply and demand do that. At least that’s the way it’s supposed to work since the central bank retired its magic wand following the free float of the Egyptian pound back in January 2003.
But the government does occasionally intervene. In this case, the Central Bank of Egypt reportedly bought up around $500 million to stabilize the pound. Buying dollars to keep the pound from appreciating? That’s got to be a first.
The US dollar’s decline against the unusually sturdy Egyptian pound in recent months is not really much of a mystery. Nor a surprise. The greenback has slumped against all major currencies due the struggling US economy and the Fed’s decision to cut interest rates by 50 basis points in September – with more cuts expected soon. While lower interest rates can jump-start an economy, they also tend to weaken a currency as investors transfer their funds to countries with higher returns.
While Boutros-Ghali may be avoiding any verbal or body language to suggest the direction of the exchange rate, I’ll take a stab at it. My advice: hold onto your pounds, this ride isn’t over.
CAM MCGRATH
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