The UAE economy’s only respite from the strengthening US dollar may be the prospect of the looming US-led trade war and the expected rise in protectionism after Donald Trump takes office later this month.
The dollar’s meteoric rally last year may dampen growth prospects for the UAE as property prices weaken and tourism suffers from a lack of visitors and investors from emerging markets like Russia and China. And if forecasts from Wall Street are to be taken seriously, the greenback may continue to strengthen.
Many of the biggest investment banks including Bank of America Merrill Lynch are betting that the US dollar is likely to rise even more amid expectations of further Federal Reserve rate hikes and proposed growth boosting fiscal stimulus by president-elect Trump.
The Bloomberg Dollar Index, which tracks the value of the American currency against a basket of 10 global currencies including the euro and the yen, gained 5.6 per cent since Mr Trump’s election victory in November and touched a record high during that period since the index was created in 2005.
However, there are a number of risks that may derail the dollar’s historic ascent, including an increasing war of words between the incoming US administration and China over the manipulation of the Chinese currency which makes the Asian country’s exports more competitive.
Mr Trump has been threatening to slap tariffs on Chinese goods. The Chinese have suggested through their state-run media that they would retaliate.
“In the short term, we are concerned about US data in the first quarter given negative seasonality in recent years,” analysts Athanasios Vamvakidis and Claudio Piron at Merrill Lynch said in a report.
“Negotiations for the US fiscal stimulus could be long and more difficult than markets currently expect. Trade protection remains a concern.”
Some economists have forecast that a trade war between the US and China would likely hurt the former more than the latter.
Marc Faber, known as Dr Doom for his pessimistic reports, told CNBC last month that any escalation in protectionist measures against Chinese exports to the US could be offset by demand from emerging markets.
For the UAE, a strong dollar on the whole is negative, and a further increase in its value is likely to put a damper on what has been lacklustre economic growth amid low oil prices. Receipts from service exports in the UAE, which include tourism revenue, account for 7 per cent of the country’s GDP, according to government statistics.
“The impact of a strengthening US dollar is net negative for the UAE and the region more broadly,” said Dima Jardaneh, a Dubai-based economist at Standard Chartered.
“We are expecting the US dollar to make new highs this year and this does not bode well for the region’s competitiveness. While the region’s goods export base outside of oil and oil-related is quite narrow, nonetheless services exports may deteriorate as a result of the strengthening in Gulf currencies.”
mkassem@thenational.ae
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