A strengthening dollar is pulling the dirham up against European and emerging market currencies on expectations that the US will raise rates faster than elsewhere.
This could put a cap on inflation in the UAE, and increase the value of investors’ holdings of dollar-denominated assets relative to other currencies. Outbound tourists and expats sending money home from the UAE will also benefit.
“The dollar will continue to strengthen because interest rates will rise faster in the US than in other countries, and faster than the market expects them to rise,” said Jason Tuvey, emerging markets economist at Capital Economics.
“A stronger dollar should help to bring down import prices in the UAE, and will help to limit inflationary pressures,” Mr Tuvey said.
The dollar is pegged to the dirham at an exchange rate of Dh3.67 to $1, which means that all changes in the price of the dollar relative to other currencies affect the dirham’s spending power.
The Bloomberg Dollar Spot Index, which tracks the price of the dollar versus a basket of international currencies, rose to its highest level since June 2010 yesterday.
The dollar has gained 6.6 per cent against emerging market currencies since the beginning of the year, according to the JP Morgan Emerging Markets Currency Index, and is at a two-year high against the euro.
Interest rate swaps show investors expect US rates to rise further and earlier than emerging market countries and the euro zone, according to data from Bloomberg.
At the same time as the Federal Reserve raises in interest rates, the European Central Bank “is likely to dive into quantitative easing, which will support further strength of the dollar against the euro”, Mr Tuvey said.
A strengthening dollar is good news for the UAE’s sovereign wealth funds, which have significant dollar-denominated holdings.
“Institutional investors will see the value of their dollar-denominated assets go up,” Mr Tuvey said. “If you think that the dollar is going to continue to rise, you’ll plough money into dollar-denominated assets.”
It is a good time for expat workers to send money back home, and for tourists to go on holiday, as a pricier dirham means consumers will get more foreign exchange for their money.
Ashwin Shetty, vice president of treasury at UAE Exchange, said that remittances to India, the UK, South Africa and the euro zone had all increased over the last few months.
“Indian expats are taking advantage of even the slightest weakness of the rupee against the dollar,” Mr Shetty said. “Remittances to India have increased between 20 and 25 per cent month-on-month.”
“In the euro and the pound sterling, which are at much lower prices against the dollar than last month, there’s been a substantial increase in remittances,” he said.
James Thomas, managing partner at Acuma Wealth Management, said: “If you’re travelling back to Europe or the UK, your dirham will go further. You’ll feel a little richer.”
Mr Thomas said that a number of his expat clients had decided to use current favourable exchange rates to make large property purchases or pay off mortgages in their home countries
“One client earned £30,000 [Dh178,788] on a house purchase by waiting for the exchange rate to swing in his favour – that’s not to be sniffed at,” Mr Thomas said.
When the pound-dollar exchange rate is below $1.6, Mr Thomas receives much more interest from British clients. “It’s a psychological barrier”, he said, which makes consumers rush to start transferring money back to the UK.
However, the bull run in the dollar may end prematurely if the Fed decides to postpone planned rate rises.
Three members of the Fed’s Open Market Committee, which is responsible for setting interest rates, said on Monday that a strong dollar might lead the Fed to reconsider the timing of interest rate increases.
“We’re going to take [the strength of the dollar] into account, the way it’s affecting the economy in terms of net exports and GDP growth and what it means for our inflationary developments,” said Charles Evans, president of the Federal Reserve Bank of Chicago, and an FOMC member.
abouyamourn@thenational.ae
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