UPDATE 1-Egypt pound falls on devaluation talk

Patrick Werr
Reuters Middle East

* Pound falls to 6.175/dlr, a near 8-year low

* Trading volume heavy; signs central bank selling dollars

* Analyst see rush for dollars lowering Dec FX reserve


* Analysts say c.bank's policy options limited

CAIRO, Dec 26 (Reuters) - The Egyptian pound hit a near

eight-year low on Wednesday as concerns the government might

devalue or bring in capital controls drove many to shift their

assets into dollars, traders said.

Renewed political strife over the past month has cast doubt

on the government's ability to push through spending cuts and

tax hikes, seen as a prerequisite for a $4.8 billion

International Monetary Fund loan that Egypt needs in order to

tackle a financial crisis.

Credit agency Standard & Poor's cut the country's long-term

rating on Monday and said another downgrade was possible if

politics undermined efforts to prop up the economy and public


Reflecting those concerns a day after the government made it

illegal for travellers to carry more than $10,000 out of the

country, President Mohamed Mursi on Wednesday signed into law a

new constitution shaped by his Islamist allies.

He says the bitterly contested document which he says will

help end the turmoil and fix the economy.

Market players said the political turmoil along with

dwindling foreign exchange reserves had narrowed the country's

options for dealing with a spreading currency crisis.

"The fact is that the central bank has only so much in terms

of resources available in order to combat the economic

situation, where Egypt has a long-term current account deficit

(which it also needs to finance)," said an Egypt-based analyst.

The pound was bid as low as 6.1775 to the dollar on

Wednesday compared to 6.169 on Tuesday. This was its weakest in

almost eight years and took it closer to the all-time low of

6.26 it hit on Oct. 14, 2004.

"All customers are rushing to buy dollars after the

(S&P)downgrade," said a dealer at a Cairo-based bank. "We'll

have to wait to see how the market will operate with the U.S.

dollar, because as you know there is a rush at the moment."

The planning minister said in remarks published on Wednesday

the government would not implement planned tax increases for two

weeks until it completed talks with different sections of

society to persuade them of the need for austerity measures.

To allow it to seek more popular support for the loan, the

government has also asked the IMF to delay by a month a meeting

it had scheduled to approve the funds.


The government's near-term options for the pound include

allowing it to devalue, putting controls on capital flows to

protect it, or seeking loans from abroad to top up central bank

reserves - or a combination of the three.

Dealers said there were signs the central bank was selling

dollars on Wednesday to keep the currency from weakening

further. Trading was exceptionally heavy, boosted by orders left

over from Tuesday, which was a bank holiday in Europe.

The bank has spent more than $20 billion of its foreign

reserves to support the pound since the popular uprising that

toppled Hosni Mubarak in early 2011.

Reserves fell by $448 million in November and stand at $15

billion, equal to only about three months of imports.

Bankers say the recent political turmoil is certain to be

reflected in December's reserves figures, which are due to be

released in the first week of January.

"Definitely there is pressure on the pound," said a dealer

at a second bank. "If foreign reserves are much lower at the end

of the month the central bank will have to lower the pound."

The central bank has already limited Egyptians from

transferring more than a cumulative $100,000 out of the country

since the popular uprising nearly two years ago, unless they can

demonstrate a pressing need for the funds.

But any further tightening of capital controls following

Tuesday's action against those leaving the country risked

inflicting damage on economic activity, analysts said.

In recent months Qatar has lent Egypt $1.5 billion for

budget support and promised another $500 million for December.

Turkey has also lent $500 million and promised another $500


During a currency crisis triggered by a massacre of tourists

in 1997, the government restricted currency sales, limited

imports and shrank the money supply before allowing the pound to

become fully convertible in late 2004. Over those seven years,

the pound fell to 6.26 to the dollar from 3.42.

Analysts say the central bank has become far more

sophisticated in the last decade and has more monetary tools at

its disposal.

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