x Abu Dhabi, UAEThursday 27 July 2017

Rate decision hits US dollar

The dollar has fallen to its lowest level since the global downturn as investors shun the greenback in favour of other global currencies and gold offering better returns.

A goldsmith displays gold bangles in his jewellery shop in Istanbul.
A goldsmith displays gold bangles in his jewellery shop in Istanbul.

The US Dollar Index weakened to its lowest since 2008 after the Federal Reserve opted to keep interest rates near zero to spur growth in the world's biggest economy.

Gaining from the currency's sell-off, the Australian dollar, euro and yen all climbed against the greenback as investors sought higher returns elsewhere.

Gold prices rose to a record US$1,530.22 an ounce yesterday amid demand for precious metals as a source of value.

"The perception of low interest rates in the US for some time to come is contributing to bouts of dollar weakness as investors look elsewhere for yields," said Tim Fox, the chief economist of Emirates NBD in Dubai.

The US central bank on Wednesday agreed to keep its target rate for overnight lending between banks at nought to 0.25 per cent. American interest rates have remained unchanged since December 2008 as policymakers try to bolster the recovery.

Rates in Australia and the euro zone have risen since the global downturn, making them more attractive to investors.

The UAE has also been a beneficiary of capital inflows seeking to exploit the gap between higher interest rates in the country compared with those in the US.

The three-month Emirates interbank offered rate (Eibor) is 2 per cent. In a sign of improving performance within the economy, money supply rose 6.1 per cent in the first quarter from the same period last year, Central Bank data show.

The Dollar Index, which tracks the dollar against six other currencies, fell to 72.871 in London trading yesterday, its lowest since July 2008.

Dollar weakness affects the UAE and the rest of the GCC through their currency pegs to it.

On the positive side, a lower dollar tends to help push up oil prices, meaning greater oil revenues for the region.

But higher prices also risk choking demand from big global consumers. In a reflection of the pressure crude costs are having on the US economy, President Barack Obama on Wednesday called for Saudi Arabia and other oil producers to increase their oil supplies to help stabilise prices.

Shortly before the downturn, the dollar pegs fanned regional inflation by forcing governments to adopt the loose US monetary policy, favouring low interest rates. As a result, the UAE and others increased money supply in their overheated economies.

UAE inflation stood at just 1.2 per cent last month.

"If the dollar stays weak for some time, there is a risk it may contribute to higher imported inflation," said Khatija Haque, an economist and vice president of research at Shuaa Capital.

The dollar's decline also erodes the value of GCC investments in US Treasury securities and other asset classes.

Regional investors are among the biggest holders of US public debt.

At Wednesday's Federal Reserve meeting, Ben Bernanke, the central bank's chairman, said the US would end its monetary stimulus policy, known as quantitative easing, on schedule in June.

It embarked on a second round of purchases, totalling $600 billion (Dh2.2 trillion), late last year in a bid to stimulate the US economy.

He also lowered the country's growth forecasts for the year. GDP expansion would be between 3.1 and 3.3 per cent, compared with the previous forecast of 3.4 and 3.9 per cent, Mr Bernanke said.