Will the dropping Dollar sink AED?

August 6, 2017 12:25 pm


The USD is in crisis. The uncertainty surrounding President Trump’s administration, the White House infighting that saw first Reince Priebus and then Anthony Scaramucci sacked within a week of each other, has done little to ease investors’ fears.

With his failed Obamacare repeal still fresh in the collective mind and a recent bipartisan bill tightening Russian sanctions now signed into law (against the President’s expressed wishes), confidence in Trump’s ability to implement campaign promises and push through legislative reforms are crumbling.

To add to this, there is a question mark over the US Federal Reserve’s priorities; many are wondering if shrinking the balance sheet now takes precedence over raising interest rates.

These factors are all contributing to ongoing negative investor sentiment towards greenback, something even favorable US economic data can’t negate.

The dollar has been dropping for months now; it’s on a losing run the likes of which we haven’t seen since 2011. This is of importance to the UAE because the AED is pegged against the Dollar – where it leads, the dirham follows.

The health of the USD has a direct impact on how the AED performs against other major currencies and we have already seen weakness against the EUR, AUD and GBP.

Euro

Between a shock Brexit vote and the Dutch and French elections (both of which were characterised by a marked increase in right-wing, anti-EU sentiment) the trading bloc has weathered a difficult year. Investors have been encouraged by its resilience and are currently bullish on the euro.

So far in 2017, the euro has already advanced ten per cent against the dollar. Macron’s win in France initially gave it a boost in early May, as the markets shrugged off the threat of a far-right win.

This limit to the political risk element, coupled with the IMF’s recent growth forecasts – the EU economy is expected to outperform the UK’s – has provided some stability for the currency. While gains have been sudden, the current situation suggests the outperformance will continue.

The ECB may be in no hurry to raise interest rates, but its language should become more upbeat as the year progresses. Already, we have seen the currency slip 11.4 per cent against the euro as the dollar falls, with the EUR-AED progressing from 3.87 to 4.36 as of August 4.

AUD

Australia has stronger interest rates than much of the developed world and the Aussie has clung resolutely to its high-yield status as a result. The currency has gained nearly ten per cent, mostly on the back of dollar weakness following negative Trump headlines.

The AUD-AED has so far rallied from 2.65 to 2.93 as of August 4, 2017, meaning the dirham has lost approximately 9.5 per cent against the AUD.

China remains Australia’s largest trading partner and strengthening economic sentiment towards China has supported the AUD throughout 2017. China accounts for approximately 33 per cent of Australian exports, the majority of which are centred on manufacturing materials, and the Aussie further extended its gains at the beginning of August, following strong Chinese manufacturing data.

GBP

Like AUD, dollar weakness has supported the pound. British Prime Minister Theresa May’s inability to secure a majority government during June’s election was encouraging to those buying sterling, since it reduced her power ahead of Brexit negotiations, thereby minimising the likelihood of a ‘hard Brexit.’

Despite this, the sterling has risen eight per cent against the dollar in the past 100 days. As the UK’s 11th biggest global export market, UAE consumers may feel the pinch.

However, the currency currently looks a little too strong at 1.30 and further AED losses against the pound will probably be minimal. It uncertain whether the AED could lose more than the current six per cent against the GBP this year, with the GBP-AED so far advancing from 4.53 to 4.83 as of August 4.

Understandably, five months of consecutive dollar losses have been keenly felt by currencies pegged to the greenback, including the AED. The resulting weakness is not resoundingly negative and presents profitable opportunities for foreign investment, exporters and tourism.

With ongoing USD weakness driven more by political factors and investor sentiment than economic data, it is, perhaps, best to focus on these upsides – it seems unlikely that the dollar will return to its previous milestone highs anytime soon.

Jameel Ahmad is an expert in financial market developments, and specialises in global currencies, commodities and emerging markets. FXTM’s VP of Corporate Development and  
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