Do not worry unless you run an in import business

For months on end, the Kenyan shilling has been of a falling streak, losing against major world currencies, especially the US dollar.

From my survey, regional currencies have not fared any better. A friend of mine told me that the US Federal Reserve could increase interest rates later this year.

Surely, this can only mean one thing - a further depreciation of the shilling. With Sh500,000 savings in my account, am I staring at a loss?

Can switching to a dollar account help anything? How can I cushion my savings as the shilling sheds value..

— Daniel W.

The US dollar has recently gained ground against most currencies and the Kenyan shilling has not been spared either.

This appreciation is attributed to various factors, including the anticipation that US Federal Reserve Bank will start increasing interest rates in September after a seven-year lull.

First, it is important to note that the strengthening of the dollar will not directly cut the amount of shillings held in your savings account. Unless you are in the import business or plan to travel abroad soon, then you need not worry about an immediate loss of value of your savings.

If the latter was the case then your savings would be depleted after buying dollars to import goods, or air ticket and travel expenses.

Second, it is the effects of inflation that are likely to erode the value of your savings but only if you do not take appropriate action to protect yourself.

The fact that most goods are imported means a stronger dollar will raise the prices of these goods thereby leading to an increase in inflation. Inflation has the undesirable effect of reducing the purchasing power of money because rising prices means the same amount of money ends up buying fewer goods.

DOLLAR DENOMINATED ACCOUNT

There are two immediate actions that you should consider. First, you could move your savings to a dollar-denominated account. This will protect you from any further strengthening of the dollar since you will be able to convert to shillings at the prevailing exchange rate.

However, the rate of interest on dollar-denominated accounts is very low and if the shilling stabilises, then the account would be of less value to you unless you make frequent payments in dollars.

You could also look for alternative savings products that will give you a rate of interest higher than the rate of inflation, unless your savings account is already doing so.

This will ensure that the purchasing power of your savings is safeguarded and a further appreciation of the dollar will not leave you worse off.

The direct approach would involve purchasing Treasury bills and Treasury bonds. The rate of inflation is currently 6.6 per cent but the rate of interest currently being paid to holders of these government securities is in excess of 11 per cent, which more than covers you for inflation.

The second approach would involve placing your savings in unit trust money market funds or fixed income funds.

These funds are invested in a mixture of government securities and other high yielding interest earnings assets and the rate of interest earned would also be higher than the prevailing rate of inflation.