Why the Gulf's exchange rates need to find direction
Such is the variety of people living and working in the Gulf that there will be mixed perceptions of the international value of their dollar-linked wealth and earnings these days.
Whether their income and assets are rising or falling depends, as ever, on the case-by-case experience of the respective counterparts of the exchange rates concerned, i.e. the currencies of the countries they consider home.
That’s assuming, of course, that they haven’t as savers and investors neutralised their interpretation of money, and aren’t instead spreading their finances according to some diversified currency basket. It’s feasible, of course, but most of us think in terms either of some domestic home denomination or, if sufficiently travelled, a global benchmark by which to count and allot their assets.
Notwithstanding the potential rivalries presented by the euro and the Chinese yuan, it remains the US dollar that typically provides that gauge, despite the Federal Reserve’s printing of it in outlandish quantities in recent years, leading the greenback to tend towards devaluation. A defensive dollar generally has aided America’s trade competitiveness, prompting loose talk of currency war again.
However, the US’s burgeoning economic recovery is thought likely to boost the dollar as Europe confronts the systemic threat of austerity and deflation, and China seeks to gain some leeway, through modest currency depreciation, for its economic remodelling.
For those in this region who considered themselves locally-based (while quite possibly viewing the worldwide possibilities for their investments and purchasing power), their dollar-pegged riyals, dinars and dirhams have tended to be weaker recently against the euro and pound sterling, but stronger versus the Chinese unit and Japanese yen.
Asia’s balance of payments surpluses have not counteracted the frailties of their unbalanced economies, while in Europe the ECB has not yet caved into pressure to print on the US’s industrial scale, despite the debilitated Eurozone, and the UK’s re-emergence from downturn has been relatively impressive, albeit not entirely soundly based either.
With inflation becoming well entrenched again regionally, the issue of managing cash, or translating it into other vehicles, has become pressing again.
Gulf-based HNWIs and others intending to invest overseas have the perennial conundrum of international risk exposure in currency terms across the developed blocs, besides the temptations of real estate and seemingly overbought stock and bond markets, to contend with. Naturally, those sands are always shifting. So too those of emerging markets, whose fortunes have fluctuated markedly, for their own respective reasons as well as the volatility of funds flows since the Fed engaged in tapering talk and action.
Meanwhile, those more concerned with simply repatriating income may just as well do so according to a set schedule, without trying necessarily to time the market. As in dollar-cost-averaging (a practice for regular investment in the stock market), adopting a given stream of even payments is probably the better option than seeking to second-guess the professional players in the finely-tuned foreign exchange market — unless somehow a steady or sudden trend in one direction seems a built-in prospect.
In terms of recent themes among relevant currency pairs, the much-foreshadowed but landmark election outcome in India has lifted the rupee, the Philippine peso has firmed upon an uprating of its newfound investment-grade status reflecting growing faith in its economic management, while the Australian dollar seems to have turned a corner upon sliding confidence recently, inclined to test the downside now against the US unitSo is there an abiding theme for the dollar overall, that might trump these individual stories, or is that likely tendency merely a gentle breeze compared to any buffeting imparted by the other sides of those exchange considerations?
Last week we heard from Tom Stevenson, investment director at Fidelity Worldwide Investment, that the dollar “is expected to strengthen, particularly against emerging market currencies”, so the GCC equivalents would benefit in the short to medium term.
That’s because US finances are now better placed, with economic growth supporting the budget and the shale energy boom doing the same for the current account. The likelihood of rising interest rates on the basis of improved conditions makes it a triple play in favour.
Similarly, a research note from Barclays portrayed the US’ upturn as a cyclical phenomenon whereby both growth and inflation skew probabilities towards higher interest rates and a higher dollar.
Although an observer might suggest that the scope for weakening Treasuries in that case could produce the opposite effect if overseas accounts reacted with force, indications are that the dollar might well follow the rate differential and recovery ideas as the leading narrative for traders.
Until the mood changes, of course. Sometimes it’s just an ill-defined matter of sentiment; sometimes supply and demand, and the relative balance sheets of the central banks. And, unfortunately for planning purposes, leaving speculation aside, we never really know.