Why is the Egyptian pound declining despite the growth in flows through dollar channels?

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The Egyptian pound has lost more than 5% of its value against the US dollar in the last two months, bringing the price of the US currency from levels of approximately 49.7 pounds on August 9 to about 52.3 pounds, according to the official exchange rates announced by the Central Bank of Egypt.

The decline of the pound comes despite the improvement of a number of foreign exchange sources for Egypt, most notably remittances from Egyptians abroad, tourism and export revenues, and the Suez Canal, in addition to an increase in foreign direct investment flows.

The dollar's movements raise questions about the factors pressuring the pound, and the extent of their connection to foreign capital movements (hot money), geopolitical tensions, and US monetary policy trends, according to economic analysts and banking experts who spoke with Al Arabiya Business.

Banking expert Ezz El-Din Hassanein said that the dollar's rise is linked to hot money movements in light of the geopolitical tensions in the region, which may push foreign investors to shift their investments towards American debt instruments, coinciding with the US Federal Reserve raising interest rates in September, and increasing expectations for another increase before the end of the year.

Hassanein added to Al Arabiya Business that the rise in the price of the dollar becomes beneficial to the Egyptian treasury when hot money exits, as it reduces the dollar proceeds withdrawn from the Egyptian market in the short term, and limits the gains of quick-trading investors resulting from the change in the exchange rate.

“The partial exit of foreign investors from Egyptian debt instruments increases the demand for the dollar, which may affect the price of the currency later, especially if the US Federal Reserve raises interest rates again,” according to Hassanein.

For his part, a treasury official at one of the banks operating in Egypt explained that the improvement in foreign exchange resources is not necessarily immediately reflected in the exchange rate, as the movement of the dollar also depends on the volume of demand for foreign currency to cover import needs and external obligations, in addition to the trends of foreign investors in local debt instruments.

The official, who preferred to remain anonymous, told Al Arabiya Business that the change in investor appetite towards emerging markets, in light of the uncertainty regarding geopolitical developments and the path of US interest rates, may increase pressure on the pound even with the improvement of some external indicators, indicating that the ability of dollar flows to meet market needs represents an important factor in determining the direction of the exchange rate.

Egyptian Stock Exchange data showed foreign investors recording a net sale of about 43 billion pounds ($826.2 million) in treasury bills in the secondary market last September.

On the other hand, the Executive Director of Fixed Income Markets at Al Ahly Financial Investments Company, Mahmoud Najla, believes that the recent movements of the pound do not reflect a fundamental change in the direction of the exchange market, explaining that the local currency is still moving in a horizontal range ranging between 48 and 53 pounds to the dollar for a long time.

Najla added to Al Arabiya Business that movements within this range reflect natural supply and demand mechanisms in light of the flexible exchange rate system that Egypt has followed since March 2024, and do not call for concerns about the exchange rate.

He pointed out that the improvement of the geopolitical situation is usually reflected in the exchange rate through the decline of the dollar against the pound, while the return of tensions leads to its rise again.

“During periods of improvement, the pound approached the levels of 48 and 49 pounds to the dollar, before moving upward towards 53 pounds as tensions escalated,” according to Najla.

He pointed out that the rise of the dollar globally is putting pressure on various currencies, including the pound, in light of Egypt’s financing needs in the US currency, adding that this factor should not be burdened more than its size in explaining the recent movements, which are still within a limited scope.

In addition, Hassanein expected the dollar to move in a range between 48 and 55 pounds until the end of this year, and perhaps during the first quarter of next year, according to developments in cash flows and the movement of hot money.

It is likely that any new increase in US interest rates will prompt the Central Bank of Egypt to study a corresponding interest rate move to maintain the attractiveness of local debt instruments and limit the exit of foreign investments, warning that failure to take appropriate measures may increase pressure on the pound.

Hassanein believes that the exit of more than $20 billion in foreign investments if the US Federal Reserve raises interest rates again may exacerbate the pressure on the local currency and push the dollar to exceed the expected range.

For his part, the treasury official expected the dollar to move between 50 and 55 pounds until the end of the year, suggesting that it will approach the lower limit of the range if dollar flows continue and investors’ appetite for local debt instruments improves, versus the possibility that it will approach the upper limit if foreign investment exits are renewed or geopolitical risks escalate.

The official attributed the dollar's exceeding the level of 55 pounds to additional pressure on the exchange market, whether as a result of a large and rapid exit of foreign investments or an increase in demand for the dollar beyond the available supply.