Weakening dollar should strengthen Gulf exports

Reuters/Faisal Al Nasser

• Dollar to fall against yuan, say experts
• GCC purchasing power would fall
• But exports would be more competitive

The US dollar will fall against the euro and Chinese yuan, economists are forecasting, reducing the purchasing power of Gulf currencies but making the bloc’s exports more competitive.

A weaker dollar will raise the relative cost of imports from China and much of the European Union, but other factors are more likely to affect inflation across the six-member Gulf Cooperation Council (GCC), where five currencies are pegged against the dollar. 

The sixth, the Kuwaiti dinar, is linked to a basket of currencies in which the dollar is believed to have a majority weighting.

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The dollar will fall by about 7 percent against the Chinese yuan by the end of 2025 to, 6.70 yuan to the dollar from 7.18, Bank of America Securities forecasts, extending a slide in the value of the greenback.

Similarly, Capital Economics in London foresees the yuan will strengthen by about 4 percent versus the dollar in 2024 alone, implying a fall to around 6.92 yuan to the dollar.

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According to the GCC, China was the bloc’s biggest trading partner, as sales increased both in monetary terms and as a percentage of total imports.

China’s exports to the GCC were $126 billion in 2022, the most recent data shows, which represents 22 percent of the bloc’s total imports. That is up from almost $84 billion and 18 percent in 2019, before the pandemic impaired global trade.

Similarly, China was the GCC’s biggest export market, accounting for 20 percent ($190 billion) of all exports by GCC states in 2022, of which $180 billion was hydrocarbons, plastics and chemicals. These products are priced typically in dollars so will be cheaper relative to the yuan for Chinese buyers, assuming product prices remain stable.

James Swanston, a Middle East and North Africa economist at Capital Economics, says there is a case that a declining dollar could increase the costs for importing Chinese goods.

Gulf inflation is benign. Saudi Arabia’s consumer price index increased 2.5 percent in 2023 and will rise a further 2.2 percent in 2024, the International Monetary Fund (IMF) forecasts. In the UAE, inflation will slow to 2.3 percent this year from 3.1 percent in 2023.

Swanston says: “If there were to be individual cases of firms absorbing higher costs of importing Chinese goods into the GCC, then that may lead to an increase in the price of some goods.” 

BofA Securities also predicts the euro will strengthen 10 percent versus the dollar by the end of 2025.

The EU is the GCC’s second biggest trade partner; in 2022, EU exports to the Gulf totalled just over €87 billion, while Gulf exports to China were worth almost €87 billion. Total trade was up 54 percent year on year to €175 billion.

Scott Livermore, chief economist at Oxford Economics in Dubai, says a further fall in the value of the dollar would be a less important influence on inflation than other factors.

“At the headline level, commodity prices will have a bigger impact on inflation, while domestic price pressures will be from real estate,” he says. “The PMI suggests there has been some uptick in input costs in the UAE but these are not being passed on. It’s similar in Saudi Arabia.”

The US dollar index, which measures the greenback against a basket of other major currencies,  hit a two-decade high of about 112 in early 2022, but had fallen to 103 as of last week.

The index fell to a historic low of about 72 in early 2008, prior to the global financial crisis that ultimately sparked a sustained dollar bull run.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, says: “The dollar will remain relatively strong, while some weakening in the US currency is positive for the Gulf’s competitiveness.”

For the UAE, its comprehensive economic partnership agreements with India, Israel, Indonesia and Turkey will reduce trade tariffs and customs duties as well as making trade smoother more generally, Malik says.

“All of these are positive for both the growth in trade and in the longer term reducing inflationary pressures arising from a weakening dollar,” she says.

“Real estate and services are big drivers of inflation in the UAE and these take some time to adjust.

“Goods prices react more sensitive to FX [foreign exchange] moves, but goods inflation is relatively weak globally. So, all these factors will mitigate the inflationary impact of any dollar weakening.”