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21 May 2024

Greenback’s strength against pound to help imports

By Safura Rahimi


UAE companies must hedge their imported British products until the end of next year to take advantage of a new record low of the British pound against the US dollar, experts have urged.

“In the next couple of months [importers] should realise the value of the pound and hedge their imports until the end of 2008,” Emirates Bank’s head of foreign exchange trading, Radha Krishna Devalla, told Emirates Business.

By buying forward, importers can hedge themselves through options, which gives them the right to buy sterling at a particular level even if rates become unfavourable, said Devalla.

British expatriates in the UAE will also benefit from the US dollar’s strengthening against the pound as they will be able to send money back home at a much cheaper rate.

“Any weakness, and the way it will impact the GCC, is not the pound-euro exchange rate, it will be the pound-dollar exchange rate. And any strengthening of the US dollar against the GBP will be positive for this region,” said EFG-Hermes regional economist Monica Malik in Dubai.

“If the dollar strengthens that means the UAE dirham strengthens against the pound, and the value of what you’re sending home will be more,” said Malik.

However, Emirates Bank’s head of foreign exchange trading warns that cheaper imports will not be passed onto the consumer to the same extent that the pound is falling.

“I don’t think consumers here would take away the benefits as easily as they would like to.” Devalla said Emirates Bank expects pound sterling to trade close to $1.90 by first quarter of 2008, and expect it to return to $2.10 by the end of 2008, averaging about $2 throughout next year.

“The Bank of England may be reducing interest rates by another 50 basis points perhaps in the first quarter and early into the second quarter of 2008.

“After that what we expect from the Bank of England, and most of the other central banks, is to be on hold. We don’t expect that they are going to raise or lower interest rates after the 50 basis points cut we’re expecting in the first quarter of next year,” he said.

The British pound slumped to a four-month low against the dollar at $1.9807 in London on Monday.

Analysts are predicting further slumps for the pound in 2008, with Barclays bank forecasting a drop to $1.93 by the beginning of the summer and HSBC seeing the pound plunge to $1.80 by end of next year.