Skip to content Skip to Search
Skip navigation

Currency will remain strong in the Gulf as rates continue to rise

The Fed will continue to raise interest rates in a bid to reduce food and energy inflation

Reuters
How high? Fed chairman Jerome Powell is expected to continue rate rises

Jerome Powell, chairman of the Board of Governors of the US Federal Reserve, made it clear that Fed rate raises are set to continue.

While I see headline inflation numbers reducing over the coming months as petrol and food prices come down, core inflation, that is stripping out energy and food prices, is unlikely to decline.

As a result, I believe the Fed will continue on a path of further rate rises – pulling back to a 50 basis point hike in September, and will then stay between 25 and 50 basis points for the subsequent two meetings this year.

Despite this, inflation will still be far above the Fed’s two percent target by the end of the year. As such, we can expect to see continued rate rises into early 2023.

However, as these rate hikes are built in, there is little impetus for the dollar to strengthen much further.

The exception to this rule is individual countries that have specific growth inflation problems.

With many Gulf economies being closely tied to the dollar, these currencies will continue to be strong. 

As the global economy slows, demand for energy will weaken, putting broad downward pressure on oil. Europe in particular will be hard hit and it seems unlikely the bloc will avoid a recession. 

And with natural gas prices expected to rise due to supply reduction from Russia, Europe’s ability to build up storage for the winter is weakened.

Whereas, while US growth will slow substantially and there is a risk of recession, it is not a certainty.

Overall, unless the US economy contracts sharply and unemployment skyrockets, the Fed will continue to leave rates in the four percent range for a while, to ensure that inflation, and indeed inflation expectations, move back to their two percent target. 

I don’t see that happening until late 2023 at the earliest. If the Fed does keep interest rates higher for longer than markets expect, the dollar could rise again.

Randall Kroszner is Professor of Economics at the Chicago Booth School of Business, and served as a member of the Board of Governors of the US Federal Reserve from 2006 until 2009

Latest articles

Aramco pipelines

BlackRock-led investors to refinance Aramco Pipelines stake

Investors in Saudi Aramco’s gas pipeline network, led by BlackRock, the world’s largest asset manager, are planning to issue $3 billion in bonds to refinance a loan that backed their purchase of a stake in the network.   The consortium of investors took a $13.4 billion bridge loan in 2021 to acquire a 49 percent stake […]

Over the first half of the year Sanad Group signed deals with international airlines including Asiana Airlines and Deucalion Aviation

Mubadala-backed Sanad Group reports 53% revenue growth

Sanad Group, the Abu Dhabi-based global aerospace engineering and leasing company, has seen revenues increase by more than half over the first six months of the year. Figures released to AGBI show revenue totalling AED2.3 billion ($620 million) was reported in the first half of the year, up from AED1.5 billion over the same period […]

Malaysia’s HSS Engineers Berhad and its emirati consultancy HSS signed the deal top oversee construction with the Baghdad municipality

UAE company in joint venture to build Baghdad metro

A Malaysian engineering company and its UAE affiliate have jointly won a $316 million contract to oversee the construction of the new Baghdad metro. The building of the planned 148-kilometre network and its 64 stations across the Iraqi capital was slated to begin this month and end in 2029. This timeline might be delayed, however, […]