Lebanon: Currency Drops, Central Bank Sets New Exchange Rate at Transfer Firms

 Lebanon's currency continued its downward spiral before the dollar on Thursday, reaching a new low amid financial turmoil in the crisis-hit country. (AP Photo/Hussein Malla)
MANAGEMENT
Lebanon's currency continued its downward spiral before the dollar on Thursday, reaching a new low amid financial turmoil in the crisis-hit country. (AP Photo/Hussein Malla) MANAGEMENT
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Lebanon: Currency Drops, Central Bank Sets New Exchange Rate at Transfer Firms

 Lebanon's currency continued its downward spiral before the dollar on Thursday, reaching a new low amid financial turmoil in the crisis-hit country. (AP Photo/Hussein Malla)
MANAGEMENT
Lebanon's currency continued its downward spiral before the dollar on Thursday, reaching a new low amid financial turmoil in the crisis-hit country. (AP Photo/Hussein Malla) MANAGEMENT

The Lebanese central bank set an exchange rate of 3,625 Lebanese pounds per dollar to be applied by money transfer companies on Friday, a central bank source said.

This came as the local currency hit a new low amid financial turmoil in the crisis-hit country compounded by the coronavirus outbreak.

“Prices may change every day and will be set the day before,” the central bank source said, adding that the rate was based on the price dollars were fetching at foreign exchange offices.

“In the event that there are major fluctuations during the day, the price may be set again during the same day,” the source added, Reuters reported.

It was not immediately clear if the rate announced on Friday would be applied by commercial banks for such withdrawals.

The currency crash came as hundreds of Lebanese crowded outside money transfer offices Thursday, the last day that authorities allowed dollars to be dispensed to customers following new Central Bank rules.

The new rules, detailed in a bank circular released this week, require banks to convert cash withdrawals from foreign currency bank accounts to the local currency, the Lebanese pound, at market rates determined daily by the bank.

However, hundreds of protesters took to the streets in Beirut and other cities to denounce the policies of the Central Bank, ignoring regulations for social distancing because of the virus.

Parliament speaker Nabih Berri also urged the government on Thursday to use its legal powers to halt the “dramatic collapse” of the country’s pound currency before it is “too late”.

The change is meant to ease demand on the dollar but has instead caused panic among the Lebanese.

In Lebanon, people have relied on a stable national currency that has been pegged to the dollar for nearly 30 years.

The tiny Mediterranean country of about 5 million people has a large diaspora that sends foreign currency home or relies on transfers from here to students abroad. Also, many Lebanese keep their savings in foreign currency, the Associated Press reported.

The Lebanese pound traded between 3,500 and 3,700 to the dollar on Thursday, a sharp jump amid general currency depreciation that began in March. It had been pegged to the dollar at 1,500 pounds since 1990, the end of the country’s civil war.

For her part, Maha Yahya, director of the Beirut-based Carnegie Middle East Center, said the new rules are an effective float of the currency but it is not yet clear how the banks will implement them.

“Practically they are admitting the market rate. The problem is when you do it on its own without a broader financial package, and not part of a larger financial and economic rescue package, you are basically triggering a rapid inflation,” Yahya said.

The dollar is expected to continue to rise “so everybody now is hedging their bets and waiting," Yahya warned.

Lebanon is facing its worst economic crisis in decades, including unprecedented unemployment levels and a severe liquidity crunch. The crisis has been compounded by a nationwide general lockdown, in place for over a month, to combat the spread of coronavirus.

Prices of basic goods have soared— sugar for instance has gone up by nearly 67 percent. Consumer groups recorded a general 58% price increase on basic commodities since October.



China Flags More Policy Measures to Bolster Yuan

 People shop around for prosperity decorations for the upcoming Chinese Lunar New Year, at a New Year Bazaar in Beijing, Monday, Jan. 13, 2025. (AP)
People shop around for prosperity decorations for the upcoming Chinese Lunar New Year, at a New Year Bazaar in Beijing, Monday, Jan. 13, 2025. (AP)
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China Flags More Policy Measures to Bolster Yuan

 People shop around for prosperity decorations for the upcoming Chinese Lunar New Year, at a New Year Bazaar in Beijing, Monday, Jan. 13, 2025. (AP)
People shop around for prosperity decorations for the upcoming Chinese Lunar New Year, at a New Year Bazaar in Beijing, Monday, Jan. 13, 2025. (AP)

China announced more tools to support its weak currency on Monday, unveiling plans to park more dollars in Hong Kong to bolster the yuan and to improve capital flows by allowing companies to borrow more overseas.

A dominant dollar, sliding Chinese bond yields and the threat of higher trade barriers when Donald Trump begins his US presidency next week have left the yuan wallowing around 16-month lows, spurring the central bank into action.

The People's Bank of China (PBOC) has tried other means to arrest the sliding yuan since late last year, including warnings against speculative moves and efforts to shore up yields.

On Monday, authorities warned again against speculating against the yuan. The PBOC raised the limits for offshore borrowings by companies, ostensibly to allow more foreign exchange to flow in.

PBOC Governor Pan Gongsheng meanwhile told the Asia Financial Forum in Hong Kong that the central bank will substantially increase the proportion of China's foreign exchange reserves in Hong Kong, without providing details.

China's foreign reserves stood at around $3.2 trillion at the end of December. Not much is known about where the reserves are invested.

"Today's comments from the PBOC indicate that currency stability remains an important priority for the central bank, despite the market often discussing the possibility of intentional devaluation to offset tariffs," said Lynn Song, chief economist for Greater China at ING.

"Increasing China's foreign reserves will give more ammunition to defend the currency if the market situation eventually necessitates it."

China's onshore yuan traded at 7.3318 per dollar as of 0450 GMT on Monday, not far from a 16-month low of 7.3328 hit on Friday.

It has lost more than 3% to the dollar since the US election in early November, on worries that Trump's threats of fresh trade tariffs will heap more pressure on the struggling Chinese economy.

The central bank has been setting its official midpoint guidance on the firmer side of market projections since mid-November, which analysts say is a sign of unease over the yuan's decline.

Monday's announcements underscore the PBOC's challenges and its juggling act as it seeks to revive economic growth by keeping cash conditions easy, while also trying to douse a runaway bond rally and simultaneously stabilize the currency amid political and economic uncertainty.

It has in recent days unveiled other measures. In efforts to prevent yields from falling too much and to control circulation of yuan offshore, it said it is suspending treasury bond purchases but plans to issue huge amounts of bills in Hong Kong.

Gary Ng, senior economist at Natixis, said while China's onshore market has a much better pool of yuan deposits, Hong Kong plays a "significant role with higher turnover driven by FX swaps and spot transactions."

"This means that Hong Kong can be a venue for supporting the yuan through trading activities and potential investments."

Data on Monday showed China's exports gained momentum in December, with imports also showing recovery, although the export spike at the year-end was in part fueled by factories rushing inventory overseas as they braced for increased trade risks under a Trump presidency.