Kenya Shilling to Fall to 130 Against the Dollar
The Kenyan shilling is expected to continue losing value against the U.S. dollar as the U.S. Federal Reserve raises rates by 0.25 percentage points to 4.75 percent while the Central Bank of Kenya maintains rates at 8.75 percent.
Analysts at FXPesa state that despite the CBK’s dovish stance on policy tightening, an aggressive Federal Reserve is anticipated to further weaken the US Dollar-Kenya shilling (USD-KES) exchange rate, which weakened from 123.5 to 124.5 in January.
The current value of the shilling against the dollar is 125.
According to Rufas Kamau, the chief market analyst at FXPesa in Nairobi, a strong recovery in the DXY – the forex benchmark that compares the value of the US dollar to a basket of six foreign currencies – will likely push the USD-KES to 130 in February as demand for US treasuries continues to rise due to higher interest rates.
The Central Bank of Kenya (CBK) chose to maintain rates at 8.75% on January 30th, citing the fact that the previous rate hikes have not yet been fully felt in the economy. This is a mark-timing strategy as the CBK monitors the economy to determine if additional policy changes are required.
The CBK noted in its monetary policy report that inflation slowed to 9.06% in December, with food inflation falling to 13.8% from 15.4% in the previous month.
Major currencies have had a strong start to the year against the dollar, with the Australian dollar leading the gains against the Dollar with a 2.86 percent increase in January 2023.
The British pound gained 1.95 percent against the dollar, while the New Zealand dollar gained 1.31 percent. The dollar index (DXY) is down 1.23 percent in January after volatile swings between 105.38 and 101.35 in the first and third weeks of the month, respectively.
“Since the start of 2020, the Kenyan shilling has lost roughly 25% of its value against the U.S. dollar, falling from Ksh99 to Ksh124,” according to Mr. Kamau, a market analyst at FXPesa. This means that Kenyans will require 25% more shillings to purchase the same amount of dollars.
Importers are paying an additional 25 percent and have been forced to raise their prices, thereby increasing the price of consumer goods. On the other hand, exporters are receiving more shillings for the same quantity of exports, making their products less expensive on the global market.
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There are numerous causes for the Kenyan unit’s decline against the US dollar. Mr. Kamau explains, “First, the Federal Reserve Bank of the United States (Fed) has been extremely aggressive in monetary tightening, increasing interest rates from a ceiling of 0.25 percent in March 2022 to the current rate of 4.5 percent.”
As a result, the US dollar has increased in value relative to other currencies, such as the Kenyan shilling, according to him. “In September 2022, the Euro traded at an all-time low of 0.9535 US dollars per Euro,” he says.
This was a 15% decline from the exchange rate at the beginning of 2020. By October 2022, the Japanese yen had lost 40% against the US dollar, having peaked at 151.9 before beginning to recover.
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