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The fall of the US dollar: What does it mean for your dirham?

The US Dollar’s downward spiral continues to captivate the markets and has been the main talking point of early 2018, writes FXTM’s Global Head of Currency Strategy and Market Research, Jameel Ahmad. But what does it mean for the UAE Dirham (AED)?

Last year was the worst since 2003 for the greenback, which racked up losses close to 10%. It’s a trajectory that looks set to continue – the currency dropped a further 3% in January 2018, taking it to its lowest level since December 2014.

The Federal Reserve’s loudly voiced optimism over increased inflationary pressures for 2018, coupled with a relatively positive appraisal of the US economy, should have played to the upside, but the dollar remains in the doldrums, suggesting that there are other fundamental drivers at play.

Dollar weakness and the Dirham

For the AED, pegged to the greenback, it’s not all bad news. A depressed currency has major advantages in a global marketplace, and continued dollar weakness is impacting the markets worldwide. EUR/USD hit 1.25 briefly on 25 January, its strongest level since December 2014.

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Sterling has fared even better, gaining 5.10% on the dollar in January to scale levels unseen since the shock Brexit vote of June 2016.

Asian currencies, too, are reaping the rewards of a weakened dollar, and even some emerging market currencies such as the Chinese Yuan and Malaysian Ringgit have gained against the greenback.

This global outlook bodes well for the national economy, increasing the competitiveness of UAE exports to EU and Asian markets.

Producers in sectors including jewellery, automotive and mining are likely to see benefits to their bottom line while dollar weakness persists.

Service sector businesses such as retail, tourism and real estate also stand to benefit from a weakened USD (and a subsequently lower AED), as foreign visitors capitalise on their increased spending power.

The inverse relationship between commodities and USD is also good news for Gold and Oil. Gold in particular was trading high the last week of January, although increased investor interest in U.S jobs data saw it lose 0.2% on Thursday 2 February.

We may see further loses in the short-term, but I think persistent dollar weakness is likely to cushion the yellow metal’s downside.

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2018 Outlook for the Dollar

Why are the markets so negative on the dollar, particularly with ongoing adjustments in US interest rates set to continue this year?

Volatility surrounding President Trump is at an end – the markets no longer jump at every hostile tweet – but concerns around his protectionist stance persist.

It is my belief that investor confidence has been weakened by a US determined to distance itself from globalization at a time when other major contributors to the global economy, most notably a still emerging China, are embracing it.

This may well be the chief driver of dollar weakness (interest rate hikes and yields on tax cuts were priced in a long time ago), but there also remains an element of uncertainty surrounding the new US Fed Chair, Jay Powell, which could be playing on investors’ minds.

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Unlike his predecessor, Janet Yellen, Powell is a lawyer by trade.

He is joined by new governors with similarly diverse backgrounds, and confidence in the abilities of this FOMC to navigate any unexpected economic shocks is universally low.

Powell also faces a challenging legacy, it will be up to him to unwind the Fed’s mammoth balance sheet and ensure continued economic growth.

All this at a time when the global economy is increasing and the distance in economic recovery between the US and the rest of the world continues to narrow.

In short, key fundamental drivers are contributing to a persistent weakness in the USD and, with ongoing political uncertainty in Washington and an inexperience Fed Chair poised to take over the reins of the economy, there could yet be further losses on the cards for the greenback.