The riel turns the corner, but devaluation continues

via CAAI

Monday, 04 October 2010 15:01 Steve Finch

FOLLOWING months of concern over the sliding riel as the National Bank of Cambodia purchased US$48 million worth of the local currency, the decline now looks to have eased. However, signs the Cambodian currency has turned the corner have little to do with domestic monetary policy and everything to do with the performance of the greenback.

As most Phnom Penh money changers were offering 4,230 riels to the dollar yesterday – stronger than the 4,240-riel rate for most of last week and certainly an improvement on the typical 4,260 rate available from around May to August – the dollar has taken a turn for the worse.

Whereas a falling euro in the wake of the Greek debt crisis in April fuelled a surging greenback (and in turn, a plummeting riel), last week the dollar fell to its lowest against the euro since March as the United States Federal Reserve suggested it was considering further economic stimulus measures and would keep interest rates low in a bid to aid the misfiring American economy. So whereas investors sought safety in the US currency back then, now many appear to be avoiding a weak dollar at all costs.

The greenback hit a six-month low against the euro at US$1.379 on Friday as the US currency also slid against the yen, the Australian and New Zealand dollars, the South Korean won and the Swiss franc. It’s the same steady decline that saw Asian currencies complete a fifth weekly advance against the dollar last week. That is good news for the riel, which has struggled in recent months – and its prospects are only likely to improve up to the end of the year.

Bloomberg reported that economists have revised forecasts for the euro-dollar exchange rate up to $1.30 for the fourth quarter, a sign the greenback will remain weak on international markets in the coming months, and that the riel will likely get further breathing space.

Typically the riel strengthens at the end of the year anyway as the harvest prompts demand for the local currency when agricultural transactions – almost exclusively conducted in riel – escalate significantly. In each of the past three years, the riel rate has climbed in December on the average in July, and that looks almost certain to continue this year. Still, the Cambodian currency has fallen overall year-on-year since 2006.

In the longer term, the riel is likely to continue its slow downward slide – the Economist Intelligence Unit is forecasting an average 1.5 percent drop in the value of the local currency against the dollar this year and in 2011.

But, for the moment, the riel is in recovery.

Perhaps there is a small opportunity to develop a window of rising riel confidence in the meantime given that savings deposit rates in the local currency are the most competitive ever as more microfinance organisations obtain deposit licences and as the central bank clamps down on unregistered money changers.

These are only small developments, however. Ultimately, the tiny riel remains beholden to the whims of the mighty dollar. And thankfully, over the coming weeks the dollar is looking anything but strong.