Euro's below-parity trading with dollar to boost remittances from UAE

The currency weakened against the greenback on rate increase fears and rising gas costs in Europe

DUBAI , UNITED ARAB EMIRATES Ð July 5 :  Expats sending money to India from UAE Exchange at Lulu hypermarket in Al Barsha in Dubai. ( Pawan Singh / The National ) For News
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Exchange houses in the UAE reported a small surge in remittances to Europe after the euro hit a new 20-year low when it fell below parity against the US dollar, giving European residents a window of opportunity to capitalise on favourable exchange rates and send money home.

Al Fardan Exchange began reporting an increase in remittances by European residents in the UAE at the start of the third quarter of 2022.

“The remittance count to Europe has increased by almost 12 per cent, compared to previous months, and we are expecting more business in coming days following the euro's weakness,” said Hasan Al Fardan, chief executive of the exchange house.

Al Ansari Exchange recorded an increase in remittances to Europe over the past 15 to 20 days.

The surge coincides with the summer holiday season, when demand for the euro typically increases among holidaymakers, European expatriates flying home for the summer, property owners and students, said Rashed Al Ansari, chief executive of Al Ansari Exchange.

There has been a slight increase in euro remittance volumes, a Lulu Exchange representative said.

However, there could be a surge in remittances as some people are on standby, waiting for the currency to weaken further before sending more money.

The European common currency fell as much as 1.1 per cent to 0.9928 on Monday — below the two-decade low of 0.9952 reached in July — shifting away from a brief period of relief that propelled the euro to about $1.03 earlier this month.

On Monday, the currency was trading at levels last recorded in 2002 on a resurgent dollar, according to Bloomberg.

However, the single currency fell 0.21 per cent to 0.9922 as of 10.02am UAE time on Tuesday.

The greenback was boosted by expectations that the US Federal Reserve will raise rates faster and further than peers. The surging cost of energy in Europe is a major fear for the euro.

“Major currencies are depreciating against the US dollar. In addition to this, geopolitical tensions and mounting oil prices are making the return to normal economic conditions tricky,” a Lulu representative said.

Craig Erlam, senior market analyst for the UK, Europe, Middle East and Africa at forex broker Oanda, said the euro's weakness stemmed from the economic outlook, which is being compounded by the central bank as it is forced to raise interest rates.

“There is clearly a view that the economy isn't strong enough to sustain higher rates on top of the energy crisis that is coming this winter, among other price pressures,” Mr Erlam said.

It is hard to see a bullish case for the euro in the short-term, given the dimming economic prospects, Mr Erlam said.

The dollar index, which tracks the currency against a basket of six peers in which the euro is the most heavily weighted, rose to 108.92.

The US currency has gained on expectations that the Fed will continue to aggressively raise rates as it tackles soaring inflation.

“There are renewed worries the Fed might lift interest rates by 0.75 per cent next month, which would be three 75 basis points hikes in four months,” said David Madden, a market analyst at Equiti Capital.

The safe-haven US currency is also supported by worries about growth elsewhere, with China in particular enforcing strict zero-Covid policies to contain new outbreaks.

“A mixture of euro weakness and US dollar strength has driven EUR/USD back below parity, a short while ago the currency pair printed a fresh 20-year low,” Mr Madden said.

“Rising gas prices and continued uncertainty about future energy supplies are weighing on the single currency.”

Edward Moya, senior market analyst for the Americas at Oanda, said Europe’s recession was a foregone conclusion, especially as the risks of disruptions to energy supplies remained elevated.

“Maintenance [of] Nord Stream 1 is a big risk for Europe as no one knows when and how much supplies will come back online. The key pipeline is expected to be suspended for a few days between August 31 and September 2,” he said.

The weakness in the euro also spilt over into other markets, with the sterling falling 0.5 per cent against the greenback to $1.1767.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said the EUR/USD could sink deeper below parity, but how far it could go will mostly depend on how much the dollar can rally from here.

“It is increasingly likely we see the dollar index hit the 110 mark, but whether it could extend gains meaningfully above that level is the million-dollar question,” she said.

“Because if it did, we are all in trouble. The strong dollar will add to the inflationary pressures elsewhere in the world, leaving other countries in an accelerating inflation spiral due to higher import prices.”

Risk aversion makes the dollar the preferred investment asset for the global market, according to Vijay Valecha, chief investment officer with Century Financial.

“Going ahead, the euro is likely to remain under pressure as the Fed is likely to continue with its hawkish pledge. Interestingly, while the Fed is going on in full-throttle mode, the ECB is likely to stay put owing to its own domestic macro crisis and energy issues,” Mr Valecha said.

“Euro could likely see a retest near the 0.97 to 0.9750 zone.”

Updated: August 23, 2022, 8:06 AM
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