UAE economy could benefit from sustained weakness of US dollar

By Rahul Vaimal, Associate Editor
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The recent losing streak of the US dollar brings optimism for the non-oil sectors of the UAE, but the impact of COVID-19 may restrict an economic boost.

As fast-tracked preparations to develop a coronavirus vaccine in the US reinforced the demand for risk assets, the dollar fell to a two-and-a-half-year low this week. The dollar’s ​​appeal as a safe haven will weaken the potential of a viable vaccine and boost global growth.

The peg of the dirham to the reserve currency of the world implies that a weaker dollar would have a knock-on impact on the land, remittances and travel and tourism markets of the UAE.

Scott Livermore, chief economist at Oxford Economics said, “A weak US dollar is a boost for the UAE’s non-oil economy, making the economy more competitive, especially in Europe and Asia.”

Mr. Livermore pointed out that the UAE would need a sustained period of US dollar weakness to reap the full benefits of relatively low pricing.

“Living in the UAE might become more expensive due to higher import prices. A weaker US dollar also reduces the purchasing power of the UAE’s oil revenues but given the economy’s financial strength, this is unlikely to constrain government policy,” he further added.

Will McKintosh
Will McKintosh
Residential & Investment Transactions Head

“In the case where the dollar peg to the dirham is lower, investors holding other foreign currencies benefit and may choose to purchase in the UAE sooner rather than later. As such, any foreign investor holding USD, or another USD-pegged currency, may choose to hold off from deciding until they feel their currency position has got better.”

Although it was a difficult year because of COVID-19, local and international buyers have increased their interest in the Dubai market, Mr McKintosh added.

Property also enjoys a safe-haven status during volatility in currency markets.

“We are currently seeing a record level of demand and transactions in the secondary market, driven by both increasing levels of end-users and investors,” said Lewis Allsopp, chief executive of Dubai-based real estate broker Allsopp & Allsopp.

He noted that the combination of a weak dollar and rising property prices for the first time in more than six years in some areas of Dubai would mean that some savvy buyers will consider it an ideal time to enter the market.

Rajiv Raipancholia, chief executive of Orient Exchange said, “There may be a 2 to 5 percent drop in remittance volumes from the UAE as it will become expensive to remit. The dollar is expected to weaken against major currencies. The remitting power of consumers will reduce as it would cost them more in dirhams to remit the same amount, for example, in Indian rupees or Philippine pesos.”

A weak dollar could attract more foreign funds to UAE equities. According to Century Financial’s chief investment officer Mr. Vijay Valecha, “Indian, Chinese, Russian and British investors could suddenly find UAE equities more attractive as they become cheaper in their local currencies.”

Another positive impact would be that the UAE will become a less costly holiday destination for potential tourists, improving the local hotel industry.

“On a macro level, a weak dollar will boost export competitiveness of the UAE’s non-oil economy, which accounts for almost 70 percent of its gross domestic product. A weak dollar is also a positive for crude oil, which is the biggest revenue of the UAE federal government,” added Mr. Valecha.