It is shaping up to be a big week for the dollar as forex traders and currency exchanges anticipate a surge in activity
The US dollar, to which the dirham is pegged, is heading for its best month since July – good news for thousands of expatriates remitting money home.
But this week two events could determine the dollar’s future course. The European Central Bank is expected to boost monetary stimulus, while the publication of US payroll data will be scrutinised by the Federal Reserve before its meeting next month. Events will be watched closely by UAE and GCC-based expatriates, who have taken advantage of the strong dollar to increase remittances to their home countries. A report by the World Bank released last month predicted that remittances from the GCC are forecast to increase to destinations including India, Pakistan and Egypt for 2015, despite lower oil prices.
Global currency investors are increasingly questioning how much further the US currency can strengthen after appreciating almost 10 per cent this year.
The Bloomberg Dollar Spot Index is trading near its highest in data going back to December 2004, while Société Générale’s Kit Juckes wrote in a client note on Friday that the currency is overvalued by some measures. At the same time, futures show traders continue to pile on dollar wagers amid speculation that the Fed will raise rates next month.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 peers, added 0.5 per cent last week. The measure is set to rise 2.3 per cent this month.
The dollar’s strength has fuelled speculation that Arabian Gulf economies, especially Saudi Arabia, could adjust their currency pegs against the US currency, in an effort to boost non-oil trade after weak crude prices.
Such a development is unlikely according to Tim Fox and Khatija Haque, respectively chief economist and head of Mena research at Emirates NBD.
"The benefit of dropping or changing pegs that have stood the test of time — lasting for 30 years in Saudi Arabia's case — and which have largely proved successful in terms of anchoring monetary policy and growth, and maintaining relatively stable capital flows, would seem to be quite small relative to the risks that could arise out of making such a shift," said Mr Fox and Ms Haque in a column for The National.
European policymakers meet on Thursday to discuss monetary policy and what the ECB can do to spur growth within the region. The central bank is considering cutting its deposit rate further below zero and adding to its programme of quantitative easing.
That contrasts with the US, where officials are edging closer to a rate increase as early as December. Mrs Yellen is scheduled to address the Economic Club of Washington on Wednesday and appear before a congressional committee the following day, 24 hours before November US jobs data are released.
jeverington@thenational.ae
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