Business | Markets
Dollar recovery to dip inflation
The strengthening dollar is expected to bring some relief to Gulf residents in the form of a decline in the cost of living and higher purchasing power for local currencies pegged to the dollar, economists said on Tuesday.
- By Babu Das Augustine, Banking Editor
- Published: 23:59 August 12, 2008
Dubai: The strengthening dollar is expected to bring some relief to Gulf residents in the form of a decline in the cost of living and higher purchasing power for local currencies pegged to the dollar, economists said on Tuesday.
The dollar hit a six-month high against a basket of major currencies yesterday, benefiting from weakness in commodities and euro zone economies. The euro was at $1.4945 on Tuesday after touching a six-month low of $1.4814 earlier this week.
"The strengthening dollar is good for the Gulf region because it will reduce the imported inflation in the region and it also increases the purchasing power of the regional currencies." said Monica Malik, Director of Economic Research, EFG Hermes, a regional investment bank.
The euro has seen a sustained fall since European Central Bank President Jean-Claude Trichet said last week the euro zone economy was slowing more than policymakers had expected. Growing expectation that euro zone is headed for a slow down is boosting the dollar.
"The dollar's gain will put less pressure on GCC governments to revalue their currencies. However, it is too early to say the trend will continue as the US still has a very high trade deficit. In addition, the economy is still facing a recession. If the credit crisis worsen, the US might also be forced to cut rates again, which could see the dollar losing its ground," said Dr. Eckart Woertz. Programme Manager Economics, Gulf Research Centre.
The persistent and sharp weakness of dollar last year had resulted in high imported inflation adding to the overall inflationary pressure in the Gulf countries that arose from a host of factors such as supply bottlenecks, high government spending and rising global food prices.
Saudi inflation was 10.4 per cent in May, Oman's inflation hit a new peak a record 13.2 per cent in May. The UAE's inflation averaged at 11.1 per cent for 2007 while Qatar had the highest average inflation rate last year at 13.8 per cent.
While facing double-digit inflation, and high money supply Gulf countries including the UAE were forced to follow the US monetary policy and cut rates.
The surging prices and policies that were out of sync with the local economic conditions had brought immense pressure on regional central banks to revalue and or depeg the currencies from the dollar.
"Both the dollar weakness and the interest rate cuts have been painful for the GCC countries, but now the worst is over. However, it is in the interest of the regional economies to have greater flexibility in monetary and exchange rate policies to meet the needs of the regional economies," said Malik.
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