The Egyptian pound EGP= weakened to a fresh six-year low to the dollar on Wednesday, as Egypt's poor economic outlook and political uncertainty prompted investors to sell the currency.
It later regained some ground after investors bought pounds to invest in a stock market rally, bankers said.
The pound traded at 5.9640 to the dollar after hitting 5.9765 earlier in the day, a the lowest since January 2005. It was down 0.29 percent from Tuesday's close.
"The pound has weakened mainly because foreigners are exiting a market hit by political instability," said a Cairo-based trader. "Egypt is getting downgraded, and for foreign investors, this is negative."
Moody's said on March 16 it had downgraded Egypt to Ba3 with a negative outlook.
The uprising that ousted President Hosni Mubarak has hammered tourism and foreign investment, two of Egypt's main sources of foreign exchange. Many analysts forecast the pound will weaken substantially as a result.
Investment bank EFG-Hermes had said it maintained its outlook for a continuous weakening of the pound driven by a widening current account deficit and large capital outflows. It forecast the pound to weaken to 6.3 by end-2011.
"It makes sense to see further weakening of the pound due to lower tourism revenue and foreign direct investment as well as a bigger current account deficit," said a currency trader.
But bankers said a four-day stock market rally renewed buying appetite into the pound later on Wednesday. Egypt's benchmark index .EGX30 closed 1.3 percent higher.
"The stock market is rebounding, and the political conditions are slowly but surely improving," one banker said.
Analysts had said Egypt's poor economic outlook, weak currency and political uncertainty after two months of political unrest may drag down share prices by as much as 30 percent in coming weeks.
The pound has lost 2.5 percent of its value against the dollar since mass protests erupted on Jan. 25.