It’s one of the unwritten but well-observed rules of financial markets, especially currencies, that a turning point is quite possibly in reach when everybody is inclined in one direction.
Such is the rocketing rise of the US dollar at present that it’s not difficult to imagine a contrarian stance becoming profitable.
Equally, it’s certainly easy enough to predict that the next point of debate will be as to when the dollar and euro will reach parity (currently $1.085/euro, already over 20 per cent removed from the $1.38 seen one year ago).
Europe today in fact is depending on currency weakness for any strength in its recovery — also indeed substantially on low oil prices — while moreover its belated resort to quantitative easing, from this week, introduces a negative demand-supply shift, as per central bank balance sheets.
Neither China nor Japan, the other key currency blocs, have a convincing alternative to offer, the former struggling to manage credit conditions, the latter managing to park the third, most critical element of its ambitious policy programme, namely structural reform.
Emerging markets have shown themselves too dependent on overseas capital flows to have an independent tale to tell.
The dollar’s star is therefore very much in the ascendancy, and perhaps it’s only an awareness of the risk of reversal, or the limits competitively of rising too much too soon, that stands in its way. Otherwise, the other well-founded proclivity in foreign exchange markets, of overshooting (therefore a prolonged bull run), would seem in play.
Naturally, the Gulf is an interested party, given the currency peg system, whether in terms of living standards, or exports and imports, or domestic and foreign investment, or the dollar’s interaction with oil prices.
So, what does it mean for the region? This column has suggested in the past that GCC currencies are essentially the “dollar-plus”, provided balances of payments remain in surplus, so what are the consequences of having an explicitly strong and implicitly even stronger set of tied exchange rates?
A key aspect of the dollar’s climb has been the boost to its own payments balance from the development of the US’s shale energy resources, which of course rebounds separately on the Gulf’s outlook.
It’s regularly noted that the dollar and oil are conversely related, a higher dollar prompting lower oil prices in dollar terms as demand from non-dollar-based importers is inhibited.
Greater purchasing power
Yet, of course, that also means that in non-dollar terms prices are not so down, and any given level of dollar receipts to exporters translates into greater purchasing power towards goods and services priced in those other currencies.
According to multi-year horizons, the impact of shale itself can be debatable in this regard, since it remains a moot point whether it constitutes a structural adjustment in favour of the dollar, creating a step-shift in the US current account, or (as Opec and other producers hope) will recede in its effect. Drilling and output in the US may diminish upon lower oil prices themselves, implying more a cyclical phenomenon.
Economically, meanwhile, it’s simple enough that the higher dollar helps quell inflation among the GCC countries, at a time when exceedingly low interest rates (required by the dollar link itself) provide no restraint. Fortunately, forecasts for 2015 are typically in the order of 3 per cent, though ticking up slightly to around 3.5 per cent next year. Only beyond 4
It’s one of the unwritten but well-observed rules of financial markets, especially currencies, that a turning point is quite possibly in reach when everybody is inclined in one direction.
Such is the rocketing rise of the US dollar at present that it’s not difficult to imagine a contrarian stance becoming profitable.
Equally, it’s certainly easy enough to predict that the next point of debate will be as to when the dollar and euro will reach parity (currently $1.085/euro, already over 20 per cent removed from the $1.38 seen one year ago).
Europe today in fact is depending on currency weakness for any strength in its recovery — also indeed substantially on low oil prices — while moreover its belated resort to quantitative easing, from this week, introduces a negative demand-supply shift, as per central bank balance sheets.
Neither China nor Japan, the other key currency blocs, have a convincing alternative to offer, the former struggling to manage credit conditions, the latter managing to park the third, most critical element of its ambitious policy programme, namely structural reform.
Emerging markets have shown themselves too
It’s one of the unwritten but well-observed rules of financial markets, especially currencies, that a turning point is quite possibly in reach when everybody is inclined in one direction.
Such is the rocketing rise of the US dollar at present that it’s not difficult to imagine a contrarian stance becoming profitable.
Equally, it’s certainly easy enough to predict that the next point of debate will be as to when the dollar and euro will reach parity (currently $1.085/euro, already over 20 per cent removed from the $1.38 seen one year ago).
Europe today in fact is depending on currency weakness for any strength in its recovery — also indeed substantially on low oil prices — while moreover its belated resort to quantitative easing, from this week, introduces a negative demand-supply shift, as per central bank balance sheets.
Neither China nor Japan, the other key currency blocs, have a convincing alternative to offer, the former struggling to manage credit conditions, the latter managing to park the third, most critical element of its ambitious policy programme, namely structural reform.
Emerging markets have shown themselves too dependent on overseas capital flows to have an independent tale to tell.
The dollar’s star is therefore very much in the ascendancy, and perhaps it’s only an awareness of the risk of reversal, or the limits competitively of rising too much too soon, that stands in its way. Otherwise, the other well-founded proclivity in foreign exchange markets, of overshooting (therefore a prolonged bull run), would seem in play.
Naturally, the Gulf is an interested party, given the currency peg system, whether in terms of living standards, or exports and imports, or domestic and foreign investment, or the dollar’s interaction with oil prices.
So, what does it mean for the region? This column has suggested in the past that GCC currencies are essentially the “dollar-plus”, provided balances of payments remain in surplus, so what are the consequences of having an explicitly strong and implicitly even stronger set of tied exchange rates?
A key aspect of the dollar’s climb has been the boost to its own payments balance from the development of the US’s shale energy resources, which of course rebounds separately on the Gulf’s outlook.
It’s regularly noted that the dollar and oil are conversely related, a higher dollar prompting lower oil prices in dollar terms as demand from non-dollar-based importers is inhibited.
Greater purchasing power
Yet, of course, that also means that in non-dollar terms prices are not so down, and any given level of dollar receipts to exporters translates into greater purchasing power towards goods and services priced in those other currencies.
According to multi-year horizons, the impact of shale itself can be debatable in this regard, since it remains a moot point whether it constitutes a structural adjustment in favour of the dollar, creating a step-shift in the US current account, or (as Opec and other producers hope) will recede in its effect. Drilling and output in the US may diminish upon lower oil prices themselves, implying more a cyclical phenomenon.
Economically, meanwhile, it’s simple enough that the higher dollar helps quell inflation among the GCC countries, at a time when exceedingly low interest rates (required by the dollar link itself) provide no restraint. Fortunately, forecasts for 2015 are typically in the order of 3 per cent, though ticking up slightly to around 3.5 per cent next year. Only beyond 4 per cent would inflation be deemed to be becoming problematic again.
As to asset markets, a roughly sideways net effect on local stocks and bonds from offsetting dollar and oil factors, as global influences, is evident. For real estate, though, the tendency may be for overseas investors to perceive the local product as progressively expensive.
Lastly, for expatriates, earnings intended for remittance improve, rarely an unwelcome outcome.
The circularity of these matters means, though, that those earnings arise substantially from the energy-based revenues to the region, so it’s the oil-price numbers that are bound to remain the focus for the medium term.
on overseas capital flows to have an independent tale to tell.
The dollar’s star is therefore very much in the ascendancy, and perhaps it’s only an awareness of the risk of reversal, or the limits competitively of rising too much too soon, that stands in its way. Otherwise, the other well-founded proclivity in foreign exchange markets, of overshooting (therefore a prolonged bull run), would seem in play.
Naturally, the Gulf is an interested party, given the currency peg system, whether in terms of living standards, or exports and imports, or domestic and foreign investment, or the dollar’s interaction with oil prices.
So, what does it mean for the region? This column has suggested in the past that GCC currencies are essentially the “dollar-plus”, provided balances of payments remain in surplus, so what are the consequences of having an explicitly strong and implicitly even stronger set of tied exchange rates?
A key aspect of the dollar’s climb has been the boost to its own payments balance from the development of the US’s shale energy resources, which of course rebounds separately on the Gulf’s outlook.
It’s regularly noted that the dollar and oil are conversely related, a higher dollar prompting lower oil prices in dollar terms as demand from non-dollar-based importers is inhibited.
Greater purchasing power
Yet, of course, that also means that in non-dollar terms prices are not so down, and any given level of dollar receipts to exporters translates into greater purchasing power towards goods and services priced in those other currencies.
According to multi-year horizons, the impact of shale itself can be debatable in this regard, since it remains a moot point whether it constitutes a structural adjustment in favour of the dollar, creating a step-shift in the US current account, or (as Opec and other producers hope) will recede in its effect. Drilling and output in the US may diminish upon lower oil prices themselves, implying more a cyclical phenomenon.
Economically, meanwhile, it’s simple enough that the higher dollar helps quell inflation among the GCC countries, at a time when exceedingly low interest rates (required by the dollar link itself) provide no restraint. Fortunately, forecasts for 2015 are typically in the order of 3 per cent, though ticking up slightly to around 3.5 per cent next year. Only beyond 4 per cent would inflation be deemed to be becoming problematic again.
As to asset markets, a roughly sideways net effect on local stocks and bonds from offsetting dollar and oil factors, as global influences, is evident. For real estate, though, the tendency may be for overseas investors to perceive the local product as progressively expensive.
Lastly, for expatriates, earnings intended for remittance improve, rarely an unwelcome outcome.
The circularity of these matters means, though, that those earnings arise substantially from the energy-based revenues to the region, so it’s the oil-price numbers that are bound to remain the focus for the medium term.
cent would inflation be deemed to be becoming problematic again.
As to asset markets, a roughly sideways net effect on local stocks and bonds from offsetting dollar and oil factors, as global influences, is evident. For real estate, though, the tendency may be for overseas investors to perceive the local product as progressively expensive.
Lastly, for expatriates, earnings intended for remittance improve, rarely an unwelcome outcome.
The circularity of these matters means, though, that those earnings arise substantially from the energy-based revenues to the region, so it’s the oil-price numbers that are bound to remain the focus for the medium term.
