A strong US dollar, driven by economic data and revised expectations of interest rate cuts in 2025, creates a mixed landscape for retail investors, say market experts.
It presents opportunities in certain sectors but also poses risks, and investors must adjust their portfolios accordingly, they recommend.
The dollar index, which measures the US currency versus six other units, was 109.55 at 3.52pm UAE time on Tuesday, not far from the 26-month high of 110.17 it touched on Monday.
“On the positive side, a strong dollar boosts purchasing power for investors looking to diversify into international markets or buy foreign assets,” says Tony Hallside, chief executive of STP Partners, a prime brokerage firm based in Dubai International Financial Centre.
“However, it can reduce earnings on investments denominated in weaker currencies due to unfavourable exchange rate conversions.”
The US dollar hovered near its highest level in more than two years on Tuesday as traders scale back wagers on US rate cuts in 2025 after strong economic data.
US jobs growth unexpectedly accelerated in December and the unemployment rate fell to 4.1 per cent. This reinforced support for the US central bank’s cautious stance towards further monetary policy easing this year.
President-elect Donald Trump returns to the White House on January 20. His plans for hefty import tariffs, tax cuts and immigration restrictions could stoke inflation, adding to expectations of a less aggressive easing cycle.
The threat of tariffs along with the Federal Reserve’s stated measured approach to rate cuts this year have lifted the dollar, putting the euro, pound, yen and yuan under pressure.
“Barring any unforeseen and abrupt turn in the US data, it is difficult to see a near-term catalyst that would materially push the USD lower,” Bank of America analysts wrote in their 2025 US dollar forecast. The analysts, however, expect the dollar’s valuation to normalise in the second half of the year, “with the details of US policies determining the exact path and its timing”.
Mr Hallside believes there is potential for the dollar to climb further this year, which will have “far-reaching implications for investors globally”.
What it means for GCC investors
Ryan Lemand, chief executive at Neovision Wealth Management, says a strong US dollar will affect UAE residents’ personal budgets. They should see a positive impact from the increase in purchasing power as well as the ability to remit expat savings.
Mr Hallside says that for GCC retail investors, whose currencies are often pegged to the greenback, a stronger dollar can provide stability in overseas investments and potentially favourable opportunities in sectors aligned with US economic growth. However, emerging market investments may face increased risks, he warns.
Financial coach Jay Adrian Tolentino says for UAE investors, the dirham’s peg to the US currency means a strong dollar does not directly affect purchasing power. However, its impact on investments depends on what you hold, he adds. If you invest in things priced in other currencies, such as euros or yen, a strong dollar can make your returns smaller when you convert them back to dirhams.
Agreeing with him, Nicolo Bocchin, global head of fixed income at Azimut Investments, says a strong dollar does not change much for UAE investors.
“Portfolios won’t be subject to swings related to [foreign exchange] exposure [if based in AED and USD]. This volatility, if anything, offers the opportunity to take advantage of the weakness in other currencies to introduce new layers of diversification in portfolios,” he says. “Brazilian real and Turkish lira remain our top picks in FX.”
Company stocks
A strong US dollar can have both positive and negative effects on retail investors and their equity market investments, says Naeem Aslam, chief investment officer at Zaye Capital Markets. If you are invested in companies with significant overseas operations – for example, tech companies or global brands – their profits may take a hit.
It can hurt US-based multinational companies by reducing the value of foreign revenue when converted back into dollars, which may squeeze profits and impact stock performance, particularly for companies reliant on international sales, he explains.
Additionally, a stronger dollar might make US equities less attractive to foreign investors, potentially leading to capital outflows, Mr Aslam points out.
“However, for retail investors holding stocks in companies with significant domestic exposure or sectors like technology, a stronger dollar may be beneficial, as it could provide stability in consumer prices and act as a hedge against inflation,” he says. “Moreover, a strong dollar might attract foreign investment in US assets, making them more appealing.”
Rupert Connor, partner at Abacus Financial Consultants, says a strong dollar can make imported goods and services cheaper, benefiting companies that rely heavily on imports. Retail investors with exposure to such companies may, therefore, see improved profitability.
A strong dollar might favour domestic-focused companies over international ones, so retail investors could consider adjusting their portfolio to include more small-cap stocks or domestic exchange-traded funds, which tend to have less exposure to foreign markets, he suggests. For investors in international funds, or ETFs, choosing currency-hedged options can reduce the impact of a strong dollar.
partner at Abacus Financial Consultants
Emerging markets and commodities
Emerging markets equities and bonds often face pressure due to increased borrowing costs, as many of these countries rely on dollar-denominated debt, says Ben Bolger, a financial planner in Abu Dhabi.
Agreeing with him, Mr Connor warns that a strong dollar could make investments in emerging markets or related ETFs riskier.
“Commodities like gold and oil are priced in dollars. When the dollar is strong, these commodities can become more expensive for buyers in other currencies, which can lower demand and push prices down, which can hurt retail investors holding commodity-based investments,” he adds.
US bonds and deposits
Mr Lemand says that since US dollar rates are higher, holding bank deposits is significantly remunerative and even bonds have started to provide adequate compensation for holding them.
However, long-term yields are still rising, leading to bond prices coming down, so shorter to medium term bond investments are still preferred, he suggests.
Portfolio rebalancing
Mr Connor advises retail investors to always evaluate how their portfolios are positioned relative to any market dynamic and consider diversifying to manage currency-related risks.
Mr Hallside suggests diversifying into assets that act as natural hedges against a strong dollar such as commodities or equities in stronger currencies. Navigating this currency situation requires “thoughtful” portfolio rebalancing, he suggests.
