Renewed strength in the US dollar following the re-election of Donald Trump has put pressure on the Kenyan shilling, which is trading at a near four-month low against the greenback.
The local unit traded at Sh129.55 on Friday last week, compared to Sh129.19 on November 6, when it became clear that Trump had won the election to become America's next president.
The weakening of the local currency against the dollar --through which most international trade is conducted-- risks making imports more expensive.
Friday’s rate is the lowest in nearly four months since August 6, when the local unit traded at Sh129.79 to the dollar.
Trump’s return to office has pushed investors back to the US dollar in anticipation of dollar-friendly policies, including the imposition of import tariffs.
“The dollar index has been trading modestly upward over the past two months, with individual currency pairs depreciating marginally in response to the slight strengthening of the US dollar,” said Stellar Swakei, research associate at Standard Investment Bank.
“In the short-term, this upward momentum is expected to hold as Trump settles into office, bolstered by market confidence in his appointments.”
Nevertheless, the Kenya shilling has maintained its lustre as one of the best performing world currencies with its year-to-date gains of more than 17 percent, having appreciated from Sh156.98 at the end of last year.
The local unit’s rally is anchored on the resolution of the June 2024 Eurobond maturity, which was preceded by investor jitters over a potential sovereign default, giving rise to speculation.
A February partial buyback of the Eurobond helped to restore market confidence, while incentivising new foreign exchange flows into the economy, including the offshore purchase of government securities.
The Kenyan shilling, for instance, recovered from a low of Sh160.75 on January 30 following the partial buyback in early February.
Ample foreign exchange liquidity in the market, including adequate official CBK reserves, is expected to support the exchange rate in the short to medium term, with the effects of renewed dollar strength seen as temporary.
“Notably, dollar supply remains robust, with forex reserves well-stocked and short-term demand under control. Historically, markets and investors have reacted to jitters and short-term pressures, but these appear absent for now,” Ms Swakei added.
Rebounding exports, robust diaspora remittances and external financing from concessional sources such as the International Monetary Fund (IMF) has kept the market awash with dollars, helping to keep the domestic exchange rate within a narrow band.
The CBK has complemented the improved foreign exchange flows with net dollar purchases, supporting the replenishing of official reserves, which presently meet both the statutory requirement of four-months of import cover and the 4.5 months buffer under the East African Community (EAC) convergence criteria.
The CBK says it is maintaining its policy of non-intervention in the foreign exchange market, where it allows the shilling to move freely in either direction and intervening only in the event of volatility.
The stronger Kenya shilling has helped mute imported inflation by lowering the cost of goods and services ordered from overseas, while the stock of public debt has reduced on exchange rate gains.
The shilling ended 2023 with its worst performance in three decades, driven by the unavailability of foreign exchange in the market and investor jitters over a possible sovereign default.
