A greater likelihood of a Federal Reserve interest rate hike this year took the US dollar index to a 11-year high on Thursday, with analysts suggesting a further strengthening in the months ahead.
The Dollar Index, which tracks the greenback against a basket of six major currencies, rose 0.2 per cent to 98.14. The index is up more than 8 per cent year-to-date and 23 per cent in the past 52 weeks. Against the euro, the dollar rose to $1.08.
But the response from regional stock markets was muted. The Dubai index dropped by 0.19 per cent for a second consecutive day of declines. The Abu Dhabi market fell 0.21 per cent, closing lower for the first time this week.
On Wednesday, the Federal Open Market Committee released minutes from its March 17 and March 18 meeting acknowledging slowing economic growth worldwide, but said it was still planning an interest rate hike this year, which could further strengthen the dollar.
Fed officials who pushed to lift benchmark rates in June were countered by others saying a stronger dollar would combine with declines in energy prices to curb inflation.
“It is important to watch the dollar index level, especially as it approaches the 101.70 mark, as it represents a cyclical resistance point, and in our estimation there is a low probability of it breaking above this level unless the Fed raises the rates,” said Nour Eldeen Al Hammoury, the chief market strategist at ADS Securities in Abu Dhabi.
“Going through this mark could signal the start of a further strengthening of the dollar.”
The UAE is poised to both benefit and suffer from a more expensive dollar.
“The dirham/dollar peg is opening up investment opportunities both in Europe and Asia, [but] the downside will be for UAE exports and the tourism sector,” Mr Al Hammoury said.
As the strengthening dollar makes American goods and services more expensive than elsewhere, it also reduces the value of US corporate profits from overseas operations. In 2012, the S&P 500 companies that provided details on foreign sales showed that almost 47 per cent of total sales came from abroad.
“The strong dollar may well impact a number of large US companies that compete in world markets,” said Pradeep Unni, the head of trading for commodities and currencies at Richcomm Global in Dubai. “Many Arab nationals have investments in US stock markets, and any such decline will only hurt their profit.”