Shilling hits new low amid fresh political wrangles

A higher currency value will make foreign goods and services relatively cheaper, stimulating imports, while domestic goods will seem relatively more expensive to foreigners, thus reducing exports.

If that trade deficit is viewed as a problem for the economy, the central bank may be pressured to intervene to reduce the value of the currency in the foreign exchange market and thereby reverse the rising trade deficit.   

International trade and investment decisions are much more difficult to make if the exchange rate value is changing rapidly.

If the exchange rate changes rapidly, up or down, traders and investors will become more uncertain about the profitability of trades and investments will likely reduce their international activities.

As a consequence, international traders and investors tend to prefer more stable exchange rates and will often pressure governments and central banks to intervene in the foreign exchange market whenever the exchange rate changes too rapidly.

Currency dealers say the ability of a central bank to raise the value of its currency through direct foreign exchange interventions remains limited.

In order for the CBK to buy dollars, it must have a stockpile of foreign exchange reserves.

Foreign exchange reserves are typically accumulated over time and held in case an intervention is desired.

Usable official foreign exchange reserves held by the Central Bank stood at $3.26 billion on Friday last week, compared with $3.28 billion in the first week of February.

While the CBK’s participation in the currency markets was frequent last year as the bank created demand for US dollars in the face of a strengthening Shilling, the Central Bank’s policy remains one of letting the free market economics of demand and supply dictate the direction of the local currency.