The Egyptian pound weakened to a record low against the US dollar in interbank trade and slid further still on the black market Wednesday, a fall dealers attributed to Moody's downgrading of the country's credit rating.
Moody's cited political unrest, the deterioration of Egypt's external payments position and doubt over whether the government could secure a vital US$4.8 billion loan from the International Monetary Fund.
The unrest has triggered a flight into dollars, draining the country's foreign reserves which the Central Bank of Egypt said fell to $13.6 billion at the end of January – below the $15 billion level needed to cover three months of imports.
In an effort to avoid a full currency crisis, the Central Bank introduced regular foreign currency auctions in late December. Since then, the pound has weakened by 8.2 percent against the dollar. It was last bid on Wednesday at LE6.7287 to the dollar – a new record low.
Dealers said volumes were thin, with trading switching to a parallel market where the pound was trading weaker still.
Three market participants said the currency had weakened to stand at LE7.2 to the dollar Wednesday compared to levels of around LE6.9 late last week.
"It is probably related to yesterday's downgrade (and) is definitely affecting the supply of US dollars in the market by the Central Bank. It is way too low compared to the demand,"
said one trader, speaking on condition of anonymity. "I think the gap will only widen between official rates and the parallel market as long as the supply-demand ratio is not fulfilled in the banking sector," he added.
The Central Bank held its 21st foreign currency auction Wednesday, selling $38.9 million. The cut-off price was LE6.7188 to the dollar, weaker than Monday's level of LE6.7082.
The Central Bank had offered $40 million at Wednesday's auction – the same amount it offered Monday. They are the smallest amounts on offer since the currency auction system began.
The weighted average bid at the Central Bank auctions determines the pound's price in the interbank market, but the central bank has set a trading band of 0.01 piasters that restricts its movement.
The Egyptian government in December postponed final ratification of a $4.8 billion loan agreement with the IMF because of political unrest in the country at the time.
Moody's on Tuesday cut Egypt's government bond rating by one notch to B3 from B2, and said it may cut the rating further.