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18 July 2024

UAE’s trading partners will face issues with depreciating dollar

By Safura Rahimi



The trade sector is playing a more significant role in fully integrating the UAE into the global economy, but the country’s biggest trade partners will have several issues this year with the depreciating US dollar.

China, one of the UAE’s biggest trade partners, has been under pressure from the US to allow its yuan to appreciate. However, analysts are not convinced the move is enough to give Europe and the US what they want and believe 2008 will continue to see gradual appreciation of the yuan.

“I would not hold my breath in letting the Chinese move the currency as far as the Americans in particular would like. I think the key for the Chinese is gradualism,” Paul Chertkow, head of global currency research at Bank of Tokyo Mitsubishi UFJ in London, told Bloomberg TV last week.

“I think there will be further appreciation of the renminbi [yuan]. In the past three months the average monthly appreciation against the dollar has been 0.7 per cent, I think that will probably continue. That will take us below the seven level, perhaps the 675, even 660 in 12 months time.

“But at 20 or 30 per cent revaluation of appreciation that the American manufactures have been calling for for quite some time is simply not on the cards,” he said. The US has called for China to allow its yuan to appreciate so that the US can help ease its current account deficit.
“Over time the Chinese want to rebalance growth away from the external sector to domestic demand. That means they do not have much scope for increases in interest rates but I do not think the currency is going to be allowed to appreciate to a level that would jeopardise competitiveness,” Chertkow added.

Bilateral trade between China and the UAE is expected to increase by 41 per cent by the end of 2007 to hit Dh73.42 billion, from Dh52.14bn traded last year.

The Indian rupee – which has been appreciating rapidly against the US dollar in recent months – is also expected to continue its trend.

ABN Amro Bank’s India Chief Meera H Sanyal told Press Trust India the bank expects the rupee to appreciate against the dollar at a more gradual pace than its most recent rate.

However, the US dollar is strengthening against the British pound sterling, a move that importers and British expatriates in the UAE will benefit from, analysts say. Dubai-based Emirates Bank expects the British pound to fall a bit further against the US dollar in 2008, according to the bank’s head of foreign exchange trading.

“We are expecting another five per cent fall on the value of the pound over the next couple of months,” Radha Krishna Devalla told Emirates Business, adding that British expats in the UAE would benefit from a much cheaper rate when sending money home.

Devalla said the bank anticipates the pound will close at about $1.90 by the first quarter of 2008 and return to $2.10 by the year’s end, averaging about $2 in the months in between. Any weakness impacting the GCC is dependent on the pound-dollar exchange rate and any strengthening of the US dollar against the pound sterling will be positive for this region, said EFG-Hermes economist Monica Malik.

“If the dollar strengthens that means the UAE dirham strengthens against the pound and [UK imports] will be cheaper because of the strengthening of the UAE dirham,” she added.

According to Devalla, the Bank of England may reduce interest rates by another 50 basis points in the first quarter and early into the second quarter of 2008, however Emirates Bank expects it to be on hold, along with most other central banks, after that.

“We do not expect they are going to raise or lower interest rates after the 50 basis points cut we are expecting in the first quarter of next year,” he told Emirates Business.

The British pound slumped to a four-month low against the dollar at $1.9807 in London yesterday, also hitting a new all-time low against the euro following market anticipation of more interest rate cuts in the UK.

Analysts in the UK are predicting further slumps for the pound in 2008.


In Pakistan, bankers said they expect the rupee to depreciate further in the coming year due to likely foreign fund outflows, according to Dow Jones Newswires.

Trading in the country is expected to begin tomorrow after the mourning period and closure following the killing of former prime minister Benazir Bhutto.

However, analysts believe the three-day closure will have a minor effect on the price of shares and the Pakistani rupee.

“Had the incident taken place in the middle of the week, or for that matter, even in the middle of the day, the repercussions would have been severe and longer lasting,” said Maqsood Alam, a senior financial analyst at the Karachi Stock Exchange.

The rupee had weakened a great deal against the dollar in recent months.