Could the Dollar be turning the corner?

October 9, 2017 11:05 am

Jameel Ahmad is VP of Market Research at FXTM

The Dollar entered October higher, finally breaking a losing streak of six consecutive monthly losses (its longest losing streak for over a decade). The question now is, could the USD really be turning the corner?

This question is particularly pertinent to currencies that are pegged to the dollar, for example, the UAE Dirham (AED) that has slipped in value due to the dollar freefall. Before investors get overly optimistic, about a rebound for the greenback, the longevity of that recovery needs to be assessed.

I feel that October’s performance is likely to represent a temporary correction in the dollar. While the major currency has advanced from its lowest level since 2015, the Greenback has only gained around 1.5 per cent and is still down approximately 8 per cent year-to-date. These are hardly encouraging statistics, especially if you were looking for hints that the dollar was set to regain further momentum.

Read: Dollar depressing, crude rising

What has helped the Dollar recover?

There are two different factors that have acted as catalysts to provide support for the Dollar. The first is upbeat comments from the Federal Reserve, hinting that US interest rates could still be raised once more before the end of 2017. The second is an optimistic statement from President Trump, suggesting he will successfully implement his proposal to cut taxes in the United States.

Although a basic tax plan framework has finally been announced by President Trump,  the proposal to reduce corporate tax from 35 per cent to 20 per cent, is less ambitious than originally thought. Just like his pledge to replace Obamacare, reducing tax in the United States is going to be challenging. I don’t see how the US Government will be able to agree to a programme that most believe is going to increase the US deficit. For the dirham to benefit from additional dollar momentum, we will need to see a strong indication that an agreement is possible.

How has the Dirham fared against the Euro and British Pound?

It has  been the tale of two tapes, for those looking to compare the fortunes of the dirham against the euro and British pound. The euro showed signs of losing some ground against the dirham in September, while the British pound steamed ahead against the dirham during the same month.

Could October be a similar story? I see an opportunity for the Dirham to gain against both the euro and British pound this month. Starting with the British pound, investors have priced in a heavy premium, that the Bank of England (BoE) will be raising UK interest rates. Economic growth in the United Kingdom is now the weakest in the G7 and, with the ongoing uncertainty over Brexit, the BoE will be inclined to delay raising UK interest rates. Doubts over the BoE raising UK interest rates should lead to the GBPUSD declining, representing positive news for the dirham to advance against the pound.

I also see the opportunity for the dirham to gain against the euro in October, mainly because of the uncertainty following the Catalonia referendum. The European Commission is likely to stay away from the Catalonia debate, due to the King and Government in Spain emphasising the illegitimacy of the vote, this uncertainty represents a crisis for Spain and is enough encouragement for investors to stay away from purchasing the euro for the time being.

Read: Dollar and dirham find the floor as euro soars

Will allowing women to drive improve Saudi economy?

The most intriguing news across the GCC over the past month was the surprising announcement by Saudi King Salman that females in Saudi Arabia would soon to be allowed to drive. Although some see this announcement as more of a social development, others are looking at the positive economic impact this will likely have in Saudi Arabia over the years to come.

While lifting the driving ban undoubtedly shows a significant shift in Saudi Arabia’s social development, data from the World Bank has previously illustrated that in 2016, only 15.1 per cent of Saudi females were represented in the labour force. If this figure now increases with women in Saudi having increased access to transport, it would represent a great accomplishment and likely lead to a substantial increase in economic productivity.

Read: What is the business impact of lifting Saudi ban on women drivers?


AMEinfo Staff
By AMEinfo Staff
AMEinfo staff members report business news and views from across the Middle East and North Africa region, and analyse global events impacting the region today.