African currencies stay steady as dollar plunges: the rapidly-sinking dollar is bad news for Africa's exporters as most commodities, including oil are designated in dollar terms. On the other hand, African currencies are now far more stable than they have been over the past decade.

Author:Siddiqi, Moin
Position:View from the City
 
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While the US dollar remains the benchmark currency across Anglophone Africa, the currencies of the 14 members of Francophone Africa in West and Central Africa track the movement of Europe's single currency, the Euro. The dollar recently hit a 20-month low at $1.336 against the Euro, as it yet again suffered a steep, across-the-board sell-off amid growing anxieties over a faltering US economy and yawning trade and federal budget deficits. The falling value of the US currency is bad news for African exporters, but there is relative safety in Africa's commodity-based currencies.

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Most of Africa's major currencies (except in Southern Africa) underwent a steady appreciation against the greenback in 2006 and prospects for the New Year look quite promising, underpinned by Africa's sound economic fundamentals and improving external trade.

Unlike a decade ago, when 25%-plus annual devaluation was the norm in many African countries, principal currencies (notably the South Africa rand, the CFA franc, the Nigerian naira, the Algerian dinar and the Kenyan shilling) have shown greater stability in recent years. According to the London-based Economist Intelligence Unit (EIU), the African currency index covering 15 currencies [weighted by a country's gross domestic product] appreciated by 37% versus the US dollar between 2001 and 2004, thanks mainly to a strong recovery of the rand--Africa's most liquid and readily tradable independent currency. Although the index remained well above historical lows of the 2000-02 period, it fell 10% in 2005.

Last year, the Maghreb currencies of Algeria, Morocco and Tunisia, the CFA franc, the Kenya shilling, and the Nigerian naira all enjoyed sustained exchange rate stability which was offset by the weakness of the Rand monetary bloc comprising South Africa, Lesotho, Namibia and Swaziland.

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The rand's recent depreciation to above R7: $1 has spilled over into member countries of the Southern African Customs Union, whose respective currencies are all pegged to the rand.

Increased stability

Like other emerging-market regions, African exchange rates are governed by a set of variables. The main factors are inward and outward capital flows (foreign direct investment, portfolio investments and private remittances); the external trade balance (i.e. the difference between the value of exports and imports); monthly or quarterly releases of economic data on GDP growth; inflation and public...

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