The prospect of a further strengthening of the US dollar once the Federal Reserve raises interest rates will be a mixed blessing for the UAE, analysts said.
In the past three months the dollar has risen to a decade high against major currencies such as the euro and British pound. Yesterday, the dollar index touched 97.42, the strongest since 2003. Against the euro it was just above $1.09 yesterday afternoon from $1.40 a year ago.
On the one hand a stronger dollar is expected to make imports such as cars and food cheaper thanks to the dirham’s peg to the greenback, but sectors including tourism could be hit as services become relatively more expensive for visitors from Europe.
About 16 million tourists are expected to visit the UAE this year, generating about US$20 billion in revenues, according to figures from Business Monitor International.
Last year western Europe was the biggest market for Dubai International Airport in terms of overall growth, adding an extra 1.19 million passengers. Eastern Europe was the fastest growing in percentage terms at 21 per cent year-on-year.
In the UAE “the strong US dollar will reduce tourism, and as monetary policy is effectively a true mirror of Fed, it’s likely that lower growth, lower capital inflow, lower real estate prices overall will create some weakness”, said Steen Jakobsen, the chief economist at Saxo Bank.
The IMF expects the UAE economy to grow 3.5 per cent this year amid lower oil prices.
The strong dollar is also likely to keep Arabian gulf investors interested in buying assets in Europe.
According to Pradeep Unni, the head of trading for commodities and currencies at Richcomm Global in Dubai, the ongoing Greece crisis and Ukraine issues have resulted in real estate prices crashing in many European countries. It could be a good albeit risky time for value-picking, he said.
Forex analysts are also divided over the exact timing of a rate increase in the US, which they say, could happen any time between June and September.
The Federal Open Market Committee was set to publish the minutes of its March 17-18 policy meeting last night. Last month, the Fed hinted it could raise interest rates soon.
The Fed is likely to take a cautious approach to a rate increase amid low US employment gains and a slowdown in the global economy, Jameel Ahmad, chief market analyst at the Cyprus-based brokerage firm ForexTime, said in Dubai yesterday.
Unemployment in the US hit 5.5 per cent in February, and reports indicate long-term unemployment is increasing. As a result the dollar is likely to be vulnerable to profit-taking in the short term if the Fed shows hesitation on rates, but in the long term it is expected to emerge stronger, Mr Ahmad said.
“In the short term traders want clarity that the Federal Reserve will increase interest rates. If the Fed shows caution there will be signs of impatience among traders. Long term, I don’t think the dollar has reached its peak yet.”
Any dip in the dollar is likely to be temporary, however.
“The trend for the dollar is very strong and with the US Federal Reserve likely to raise the rates in the coming months, the dollar is likely to be strong,” said Richcomm’s Mr Unni.
Saxo Bank’s Mr Jakobsen said that the Fed rate increases are unlikely to go beyond a token rise in June or September, leading to a dip in the US dollar in the third and fourth quarters.
“The US growth will be 2 per cent and not the 3.5 per cent expected by market in January,” he said. “Overall, 2015 is the final leg in this US dollar strength as no one benefits from strong US dollar in a world with too much dollar-denominated debt.”