The British pound dipped below Dh5 against the UAE dirham for the first time since January on Friday, as sterling sank to a one-month low against the US dollar amid fears the Delta variant of coronavirus would derail the global recovery.
The UK currency was at Dh4.99 against the dollar-pegged dirham at 2pm UK time, as the pound fell 0.22 per cent against the dollar to $1.3609, taking sterling to its weakest level against the greenback in a month.
The fall reflected the downbeat mood across global markets over the Delta coronavirus variant's effect on the economic recovery, in turn boosting demand for the safe-haven US dollar.
Fawad Razaqzada, market analyst at ThinkMarkets, said sterling has also been weakening recently in response to a raft of softer UK economic data.
While UK retail sales dropped 2.5 per cent in July following a 0.2 per cent gain in June, indicating a slowdown in the recovery, the country’s inflation rate slowed to 2 per cent last month while unemployment fell to 4.8 per cent amid a record rise in job vacancies.
“We saw July retail sales unexpectedly drop this morning while Consumer Price Inflation and jobless claims also disappointed earlier in the week,” Mr Razaqzada told The National.
“With signs that the global recovery is slowing down amid the resilience of the Delta variant, investors have been reluctantly agreeing with the ‘transitory’ narrative. Consequently, they have been reducing their bets about a sooner-than-expected policy tightening from the Bank of England.”
The falling pound will be good news for British expatriates in the UAE who regularly send money to their home country and have been feeling the squeeze in recent months.
Despite the UK economic downturn during the Covid-19 crisis, the dollar-pegged UAE dirham has been buying noticeably less sterling in recent months.
However, the swing below the Dh5 threshold will remind those looking to remit money to the UK of the days when Brexit uncertainty weighted heavily on the UK currency, causing the currency to dip closer towards the Dh4 mark.
The US dollar hit an almost 10-month high against major peers on Friday, amid fears the Delta strain could delay the global economic recovery just as central banks begin to reverse pandemic-era stimulus.
The dollar index, which measures the currency against six rivals, rose as high as 93.597 for the first time since early November, before trading little changed at 93.629. For the week it is on track to gain about 1 per cent, the most in two months.
“Trade-weighted measures of the dollar are pushing to new highs for the year. This comes at a time of bullish flattening in the US yield curve – typically representing a more pessimistic reassessment of growth prospects,” ING currency analysts wrote in a note.
“So even though the mood music from the Fed is very much one of a glide path to tapering, it looks like a lot of demand for the dollar is coming from investors pulling out of growth stories overseas.”
Sterling was down almost 1.8 per cent against the dollar for the week and on track its biggest fall against the greenback in two months.
Sterling’s one-month low against the robust dollar also matched a one-month low against the euro as global risk aversion propelled investors towards “safer” currencies.
“With the markets priced for Bank of England action in 2022 certainly the pound will remain vulnerable to an extension of risk-off that starts to result in investors questioning the ability of G10 central banks to raise rates at all,” Derek Halpenny, head of research, global markets EMEA at MUFG, said in a note.
“But we don’t think we are at that juncture yet.”