A weaker US dollar is expected to affect the purchasing power of people in Gulf countries, including the UAE, making activities such as sending remittances and travelling more expensive, analysts say.
The US currency dropped to a four-year low this week and is heading for its worst month since June. The dollar index, which tracks the US currency against six peers, was marginally higher – up 0.37 per cent on Friday after reports that US President Donald Trump is preparing to nominate Kevin Warsh as Federal Reserve chair. But it is down 1 per cent for the week.
"The recent weakening of the US dollar is beginning to have a tangible impact on consumer spending and purchasing power across the Gulf, particularly because most GCC currencies remain pegged to the dollar," says Hamza Dweik, head of trading for the Mena region at Saxo Bank.
"While the dollar peg continues to provide domestic monetary stability, it also means that Gulf consumers feel the effects of dollar weakness through reduced international purchasing power rather than through sharp movements in local exchange rates."
The currencies of five of the six countries in the Gulf Co-operation Council are pegged to the greenback, with Kuwait's dinar the only exception, so fluctuations in the dollar tend to have a direct impact on spending behaviour in the region.
"Most Gulf currencies are pegged to the US dollar and, because of that, when the US dollar weakens versus the euro, sterling or yen for example, the dirham and Saudi riyal effectively weaken too versus those currencies," says Carol Glynn, founder of Conscious Finance Coaching. "This matters because of the volume of US imports into the region and because of the high percentage of expat residents in the region."
Over the past year, the dollar has declined by nearly 10 per cent against a basket of major currencies, with even sharper falls against the euro, British pound and Swiss franc.
Punch in the pocket
So, which purchases will hit your wallet first? The most affected goods and services are those with the highest sensitivity to foreign exchange, Ms Glynn said. This means spending on outbound travel, foreign education and medical treatment abroad. Cross-border remittances will be pricier, with an immediate and visible trickle-down effect within four weeks, she says.
"As we need to convert from the UAE dirham to local currencies, hotels, meals, attraction tickets and tuition fees abroad all become more expensive," she says. "That need to convert in real time is what makes it feel like it was re-priced quickly."
The least affected items will be those with lower direct foreign exchange sensitivity such as housing rent, personal loans and local services including beauty salons and gyms, she adds.
Travel
Travelling from the Gulf, for personal or business trips, will be affected by the lower dollar, particularly when the destination is in Europe or parts of Asia, analysts say. This makes accommodation, dining and shopping more expensive.
chief executive and co-founder of Wego
"Because GCC currencies are pegged to the dollar, residents are finding their money doesn’t stretch as far in Europe, the UK and Switzerland – destinations that have become 14 to 16 per cent more expensive in just 12 months," says Ross Veitch, chief executive and co-founder of online travel company Wego. "A trip to Paris or London simply costs more dirhams or riyals today than it did a year ago."
For Gulf travellers, Switzerland has become 20 per cent pricier in the past decade as the Swiss franc continues its safe-haven appreciation, Mr Veitch adds.
Europe, a popular destination for people in the Gulf, is broadly about 10 per cent more expensive now than in 2016, he says. On the other hand, Japan is the "bargain of the decade" as the yen fell nearly 30 per cent against the dollar during that period, he adds.
Similarly, a "dramatic" currency depreciation has made Turkey and Egypt destinations of "extraordinary value" for Gulf travellers. "In the near term, destinations with weaker or stable currencies against the dollar continue to offer good value – Turkey, India, Egypt and, notably, Japan," Mr Veitch says. China has also become "marginally" more affordable as the yuan has softened.
"For those set on Europe ... travellers are getting creative by seeking out shoulder season deals, considering secondary cities and booking further in advance to lock in better rates," he says.
Air fares are becoming relatively stable in the winter, helping to offset some of the currency pressure for those still planning international trips, he says.
Retail
For Gulf consumers, the most immediate impact of the sliding dollar has been felt in overseas spending and imported goods priced in non-dollar currencies, Mr Dweik says.
This means imported consumer goods such as electronics, appliances, cars, luxury goods, pharmaceuticals and specialised equipment. This is because importers pay more when converting from dollar-linked currencies into stronger foreign currencies, he explains.
Luxury fashion, cosmetics, high-end jewellery, watches, premium furniture and interiors often have costs linked to Europe, so foreign exchange can show up in price tags or “quiet shrinkage”, in terms of smaller discounts or fewer promotions, Ms Glynn says.
However, Mr Dweik says the impact on everyday spending is uneven. Essential goods such as groceries have recorded only "modest" effects so far because a big share of the Gulf's food imports come from Asia, especially China, where currencies have remained relatively stable against the dollar. "By contrast, premium food products and speciality imports from Europe are most exposed," he says.
That is also true for clothing and retail, where mass-market goods are less affected than higher-end international brands.
Another often highly affected area is food and beverage, Ms Glynn says. If ingredients and beverage imports are EU-linked, then costs rise. However, menus do not always change quickly and many operators adjust portioning, sourcing or promotions first, she says.
"The broad impact of a weaker dirham on inflation is likely to be quite limited for UAE consumers," says Edward Bell, acting group head of research and chief economist at Emirates NBD. This is because China, India and the US are the top three source countries. China’s currency has been relatively stable against the dollar this year while the Indian rupee has depreciated, making imports into the UAE from India relatively cheaper, he says.
Similarly, Turkey is also a big source country for the UAE and its currency has also weakened against the dollar this year.
In terms of the scope of prices and how quickly they may rise, Mr Dweik says a weaker dollar is expected to lead to a "gradual and selective" increase rather than a "broad inflation shock".
"Many businesses hedge currency exposure or absorb part of the higher costs, which slows the pass‑through to consumers," he adds.
Therefore, headline inflation is likely to increase only mildly, while prices for highly import‑dependent goods from Europe and Japan could rise by a few percentage points over time if dollar weakness persists, he explains. "These changes typically emerge with a lag, as retailers work through existing inventories and long‑term supplier contracts."
Remittances and investments
Many UAE and Gulf residents send money home to support their families and these groups will be watching the value of their earnings closely.
"If the dirham weakens [via the dollar] versus the recipient’s currency, a fixed dirham amount buys less in that home currency so families either send more dirhams to hit the same target, or accept a lower amount received," Ms Glynn says.
In terms of savings and investments, the impact is subtle, Mr Dweik notes. While dollar‑linked savings retain their value locally, their global purchasing power declines when the dollar weakens. "Over time, this encourages greater interest in diversification, with consumers and investors looking beyond cash holdings towards international equities, non‑US assets and alternative stores of value such as gold, which has historically performed well during periods of dollar weakness," he adds.
