UAE dirham likely to stay strong

De-dollarisation unlikely to affect greenbacks domination, expert says

Somshankar Bandyopadhyay

Published: Tue 26 Sep 2023, 10:35 PM

The UAE dirham is expected to retain its strength for the rest of 2023 and the country is set to enter 2024 in lock step with the US Dollar due to the peg, experts said at the Forex Expo Dubai 2023.

“Economic growth seems to support keeping the interest rates in step with that of the US, as according to Fitch Ratings forecasts overall GDP growth to slow to 2.1 per cent in 2023 and 3.6 per cent in 2024 after close to 8 per cent in 2022, with non-oil sectors driving growth,” Amro Zakaria, senior market analyst – Mena at Forex.com, told Khaleej Times in an interview.

Excerpts:

What is the outlook for regional currencies, especially the UAE dirham, for the rest of 2023?

Swiss Re forecasts the UAE economy to expand by 3 per cent in 2023, with non-oil sectors driving growth. The IMF’s Representative Exchange Rates for Selected Currencies for September 2023 lists the UAE Dirham at 3.6725. Mesirow’s 2023 Currency Outlook notes that the USD remains overvalued against most major currencies, but as inflationary pressures ease, the Fed will most likely reduce.

In summary, the outlook for the UAE Dirham and other regional currencies for the rest of 2023 is mixed, with some forecasts predicting growth and others predicting a slowdown. The USD remains overvalued against most major currencies, but the Fed is expected to reduce as inflationary pressures ease.

With oil nearing $100 and most central banks focused on ‘higher for longer’, will this likely lead to the dollar’s decline in the rest of the year?

The UAE’s economy and stock markets generally do well in correlation with higher oil prices. Better performing capital markets further attract capital investments from overseas where growth can be lower and therefore expectations of higher returns create a higher demand for the UAE Dirham

Additionally the Dirham is slowly but surely is becoming an international currency of settlement. Both India and Russia have announced recently that they would settle bi-lateral trades in Dirhams. That will also create demand and therefore strengthen the dirham VS other currencies

How do you see the ‘de-dollarisation’ trend picking up?

The decline in the US dollar’s share of foreign exchange reserves has accelerated after the West froze Russia’s $330 billion in reserves last year for its Ukraine invasion, prompting other nations to decrease their reliance on the US currency

However, While the trend of de-dollarisation is likely to persist, the US dollar is expected to maintain its large footprint for the foreseeable future as there is no alternative that is as big, liquid, and entrenched as the US dollar, the US bond’s market, and the US banking system.

While the trend of de-dollarisation is likely to persist, the US dollar is expected to maintain its large footprint for the foreseeable future.