Dubai:The initial negative reactions of the US dollar after Donald Trump’s victory is only short-lived and the greenback is poised to strengthen against the euro and other currencies over the long term, experts have said.
There were reports earlier that UAE expatriates were turning away from the American currency, to which the UAE dirham is pegged, as a result of US election jitters. When signs of a Trump victory went up during the campaign, the dollar lost some strength.
Just as predicted, the US dollar fell in the wake of Trump’s victory, but later rose slightly following the new president’s acceptance speech. Financial experts said there are indications that the greenback could sustain its strength over the long term.
The Republican president is expected to implement policies that could lead to higher inflation and growth, which could further support the case for another interest rate increase by the US Federal Reserve and drive the dollar up.
But since these changes may take some time to happen, what UAE expatriates can expect in the meantime is that there will be a short period of volatility. “In the short term, UAE expats must brace themselves for a weaker dollar,” Raghu Mandagolathur, senior vice president for research at Kuwait Financial Centre, told Gulf News. “[The] short term will be volatile and bad for markets and investors including expats.”
“However, I believe once the dust settles down, say, in three months’ time, the US dollar will be back to where it was,” he added.
A rise in the US dollar means a rise in UAE expats’ fortunes. Prior to the election results, expats had been enjoying a big windfall, with the Philippine peso plunging to a seven-year low in September 2016.
The Indian rupee reached its lowest level this month, at more than 18.8 against the dirham.
Some of the drivers behind the US dollar’s strength include Trump's agenda on trade and immigration. “The little that is known about his economic agenda includes tighter trade and immigration policies, which will put upwards pressure on prices,” said David Kohl, chief currency strategist and head economist in Germany for Julius Baer.
“Further, most likely debt-financed tax cuts and more public spending have the potential to push growth higher. The uncertainty regarding the detailed agenda could have some short-term and very limited unfavourable effects on economic activity. However, this uncertainty will diminish gradually.”
Goldman Sachs, in its latest research note, also pointed out that the US administration under Trump will most likely “reset” the US dollar rally, adding that a 7 per cent rise is a possibility. “There is room for the dollar to catch up with where it should have been quite some time ago.”
“Our US team forecasts three hikes next year in addition to the one now likely in December. This is more than double what is priced and underpins our forecast for the dollar to rise around 7 per cent on a trade-weighted basis over that horizon.”
Christian Gattiker, chief strategist and head research at Julius Baer noted that the US economy is still growing, hence the acceleration of the US dollar cannot be discounted. “The US economy is solid and, if anything, reaccelerating. At the same time, monetary policy remains supportive with a very gradual data-depending tightening the next twelve months.”
“US infrastructure and the US dollar will be the main beneficiaries in the medium term.”
