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Ammon News - CAIRO (Reuters) - The Egyptian pound dropped on the black market Thursday, dragged down as nervous companies switched into dollars after a week of deadly riots, traders said. The black market has shriveled dramatically after the army deposed Islamist President Mohammad Morsi on July 3 and the subsequent arrival of $5 billion of aid from Gulf Arab states to top up the country’s dwindling foreign reserves.

The official price of the pound strengthened at a central bank currency sale Thursday.

Many foreign exchange shops had been closed since Aug. 14, when security forces dispersed a sit-in of Morsi supporters, triggering riots in which at least 900 people were killed, and are only now beginning to reopen. Business activity has also slowed.

Much of the black market activity is conducted in the back offices of licensed exchange shops.

One black market dealer said Thursday he was offering to buy dollars for 7.20 Egyptian pounds and sell them for 7.25 pounds compared to 7.10 and 7.15 pounds Wednesday.

“The problem now is that the country is in crisis. If you go to the bank and ask for dollars they will tell you ‘no, there are no dollars,’” said the dealer.

A currency trader with a Cairo bank said the pound’s fall was caused by temporary panic sparked by the level of street violence.

“It’s the political circumstances, the fighting in the streets and all that. It’s not good. I think it’s just a correction and everything will be stable again after we pass all of this bloodshed in the streets,” he said.

The pound weakened on the black market to as low as 8.05 per dollar early this year when the draining of reserves meant the central bank could no longer support the official rate for the currency.

The $5 billion in Gulf aid has helped the central bank to support the pound, which it had been forced to allow to depreciate since Egypt’s popular uprising in early 2011.

The pound’s official price, controlled by the central bank, has been appreciating slowly since Morsi’s overthrow.

Traders say the central bank is ensuring the pound strengthens to give the impression the economy is stable and improving despite the turmoil.

The central bank sold $39.8 million and the cutoff price was 6.9768 Egyptian pounds per dollar versus 6.9773 at an auction Wednesday, the central bank said. The cutoff price on July 3 was 7.0184.

The bank had offered $40 million.

The central bank introduced currency sales, held three times a week, at the end of December to help to stave off a currency crisis and thwart a run on the pound.

Since then, the central bank has allowed the currency to lose more than 11 percent of its value on the official market.