Expert: Unexpected Dollar strength provides turnaround for AED Dirham

May 5, 2018 8:00 am


Investors have been taken by complete surprise following an unexpected recovery in fortunes for the US Dollar. The Greenback has found itself touching its highest level since early January 2018 at the beginning of May with the major currency strengthening by over 3.5% within the past month. What has encouraged such a swing of momentum in the US Dollar is up for discussion, but it has been warmly welcomed by currencies that are pegged to the USD. The UAE Dirham (AED) as a result of the Dollar recovery now finds itself at its strongest level since early 2018 against the Euro, British Pound and Japanese Yen,  just to name a few of the currencies that have weakened significantly against the Greenback over the past couple of weeks.

There are a few different reasons that have been used to describe the stunning shift in buying momentum for the USD.  One of the main explanations that has been widely circulated is that the 10-year U.S. treasury yields rising above 3% for the first time since 2014 has been used as a psychological reason to reload on Dollar buying positions. Others believe that recent headlines from developed central banks such as the Bank of England (BoE) and the European Central Bank (ECB) signalling that they will be in no hurry to tighten interest rate policy (raising EU and UK interest rates) has lifted interest rate differentials back in the favour of the United States. While a different theory is that recent data suggesting economic growth in both the United Kingdom and Europe have slowed is a reminder for investors that the US economy is still outperforming its developed peers in terms of economic growth.

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

It has even been suggested that the improving relations between North and South Korea following the historic summit where both leaders met has been encouraging the increased buying demand for the US Dollar. It has now been speculated that the more aggressive tone of President Trump when it comes to foreign policy might actually surprise by working in his favour. This is understandably a more difficult one to believe, but it does provide some substance behind why so many are stunned by the recovery in the Dollar when there are such a multitude of contrasting reasons that have been used to sum up why the Greenback is now close to 4% stronger than just a few weeks back.

Without going any further around the contrasting reasons behind recovery of the Dollar, let’s take a look at how the Dirham has performed against some of the major currencies as the Dollar has recovered.

The major loser of the currency markets throughout the past month has been the British Pound. The Pound has sharply transitioned from being the best performing currency in the performing markets with gains in excess of 4% year-to-date; to having weakened by 0.5% during the same period at time of writing. Concerns over weakening UK economic growth, another sudden reversal in expectations from the BoE towards raising UK interest rates and renewed anxiety over the ongoing Brexit negotiations are seen as threats for the British Pound as we enter May. The British Pound has all in all nosedived from 1.44 to 1.35 in just over two trading weeks.

Read: VAT and other Dirhams at work: Any fears for UAE economy?

While not to the same extent as the British Pound, the Euro has also declined significantly lower over the past couple of weeks. At time of writing, the EURUSD has fallen below the psychological 1.20 level, with the EU currency trading back at levels not seen since early January 2018. Only a few weeks back it was expected that the EURUSD would attempt a run towards 1.30 before summer ends. Recent economic data showing that the EU economic momentum has slowed down is probably going to provide ammunition for the ECB to maintain that it will not be in a hurry to raise EU interest rates, which is something that could result in further Euro weakness over the upcoming period.

As we move further forward into May, it is going to be tough to answer where the Dollar moves next. I will be keeping a close eye on the commencement of trade negotiations between the United States and China, where early phase suggestions that talks could breakdown will be viewed as a concerning sign for investors. While the Dollar has jumped ahead against most of its currency counterparts, it has been noted that Gold has managed to successfully defend its psychological $1300 level. The Gold market has previously bounced higher on each occasion, it has looked at threat to falling below $1300, and investors might be considering adding the Yellow metal to their portfolios at its current levels.

Read: Take a good look at your Dirham; cash breathing its last

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Hadi Khatib
By Hadi Khatib
Hadi Khatib is a business editor with more than 15 years' experience delivering news and copy of relevance to a wide range of audiences. If newsworthy and actionable, you will find this editor interested in hearing about your sector developments and writing about it.



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