Market analysts suggest that hopes for the Kenya Shilling to strengthen against the US dollar, reaching pre-2020 levels of about 101, may materialize sometime in September, according to recent reports.

The Economic Intelligence Unit (EIU) released its latest monetary update indicating that the US dollar will likely remain strong against local currencies for an extended period due to sustained high Fed rates.

The report states, “The Fed cuts will come later than we previously expected. We have pushed the forecast for the date that the Fed will begin reducing its policy rate to September, from June previously, and now expect a 50-basis-point reduction before year-end (from 75 basis points previously).”

The Federal funds rate, a benchmark in interest rate markets, is crucial in setting the prime rate that banks charge their clients for loans. It is a target rate set by the Federal Reserve Bank and serves as a reference for the rates commercial banks use when lending to each other.

Changes in the federal funds rate can impact the US dollar, typically leading to increased interest rates across the economy. This often prompts global investors to sell investments denominated in their local currencies, opting for US dollar-denominated investments instead.

The outcome is a strengthened exchange rate in favor of the US dollar, consequently impacting local currencies like the Kenyan Shilling.

In its most recent review in early May, the Federal Reserve maintained its stance on interest rates, refraining from cuts as it grapples with rising inflation. The Federal funds rate has been maintained between 5.25 – 5.50 per cent since July 2023, marking its highest level in over two decades.

The strengthening of the US dollar has caused the Kenyan Shilling to depreciate by nearly 31 units since early 2020, with recent exchange rates hovering around 132.4. Notably, the Shilling had weakened to a low of 161 as of January 2024.

A weaker Shilling translates to increased costs for imports, often passed down to consumers.

The Shilling has experienced a slight recovery since January, attributed to the successful settlement of the inaugural $2 billion buyback plan. In February, the government repaid $1.5 billion, boosting investor confidence in the currency.