It’s been another busy month for the international FX markets, with ongoing political risk still dominating the headlines, writes FXTM’s VP of Market Research and Corporate Development, Jameel Ahmad.
Dollar weakness could be here to stay. August’s disappointing US job data weighed heavily on the currency. It’s had little opportunity to bounce back during the first week of September, with fading interest rate hikes and political uncertainty in Washington continuing to fuel the downside.
Factors limiting dollar rebound
Concerns over stubbornly low inflation rates are likely to compound the issue and have already awoken Fed doves. Federal Reserve Governor Lael Brainard’s latest comments were decidedly dovish in tone and have contributed towards the negative dollar sentiment currently pervading the markets.
The resignation of Stanley Fischer, Federal Reserve Vice Chairman, on Wednesday (September 6) only compounded the issue.
Faith in the capability of the Trump administration to push through promised reforms are another limiting factor for the greenback, as is the uncertainty surrounding President Trump in general.
US inflation and economic data are far from reassuring, with many investors anticipating rate hikes and scaling back in response. All of these factors are contributing to punish the USD.
A plummeting dollar is of particular note to currencies such as the UAE dirham, which are pegged to the greenback and will mirror its movements.
This is not necessarily a bad thing and a weak AED is good news for the UAE economy. The property sector is still heavily reliant on foreign spending, as are tourism and retail, all of which stand to gain from a weaker dirham.
For EU investors, UAE property is already 15 per cent cheaper this year than it was in 2016.
That’s in part due to a strengthening Euro. The market has been bullish on the currency for some months, encouraged by favourable economic data from the region. Growth in the Eurozone appears to be accelerating – in stark contrast to the US.
Recent hints from the European Central Bank that it may begin tapering its QE (Quantitative Easing) programme have further underpinned the currency, pushing it to $1.2092 on Friday – its highest level against the dollar in 32 months.
Good FX effects to stay
How long the euro’s strength can last, particularly with the German Federal Elections pending, is debatable. Current Chancellor Angela Merkel is the frontrunner of the election and general consensus is that she will remain firmly ensconced in the Chancellery for another four years.
We have yet to see investors price any risk into the euro, but it can only be a matter of days until they do. The past 12 months have seen far too many shock election results for investors to completely ignore a general election in the Eurozone’s premier state.
Have losses for the dirham peaked against the euro for now? It’s certainly a possibility.
A strengthening euro in the face of a crumbling dollar is great news for external facing UAE businesses. With geopolitical tensions rife and ongoing concerns over the competency of US leadership, the greenback is unlikely to rally anytime soon.
The UAE’s retail, tourism and property sectors are particularly well placed to capitalise on the current situation and, with the drive to reduce national reliance on oil income and the resulting growth in service businesses, ongoing dollar weakness could prove to be a boon for the UAE economy.