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CAIRO (Reuters) - The Egyptian pound dropped on the black market on 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 Mohamed Mursi 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 on Thursday.
Many foreign exchange shops had been closed since August 14, when security forces dispersed a sit-in of Mursi 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 on 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 on 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 Mursi'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 cut-off price was 6.9768 Egyptian pounds per dollar versus 6.9773 at an auction on Wednesday, the central bank said. The cut-off 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. The currency's value has been under pressure since the 2011 popular uprising chased away tourists and foreign investors.
Reporting by Patrick Werr; editing by Stephen Nisbet