Dubai – As the UAE economy grew over the years, the UAE dirham has also emerged stronger against subcontinent currencies as well as other major countries’ units in the last 10 years due to a host of internal as well as external factors.
Analysts say that, going forward, the UAE dirham will gain against most of the subcontinent currencies while the US dollar will remain the world’s dominant currency and maintains its influence in the world economy over the next 10 years. While some other major currencies such as the Chinese yuan, the Indian rupee and the Russian rouble will also gain more influence as their economies will grow bigger in size.
Since the dirham is pegged to the dollar, hence, any movement in greenback directly reflects in the UAE currency.
Over the last 10 years, the Indian rupee, the Pakistani rupee, the Philippine peso and the British pound depreciated due to higher inflation, current account deficits and economic crises, which has led to an increase in export competitiveness of these economies, says Rajiv Raipancholia, CEO of Orient Exchange, and Treasurer at the UAE’s Foreign Exchange Remittances Group.
The British pound has weakened by over 19 per cent in the past 10 years from 5.9 in 2009 to 4.7 in 2019 against the dirham, mainly due to uncertainty over Brexit. Similarly, the single European currency euro has fallen from 5.2 in December 2009 to 4.0 in December 2019, a depreciation of 23 per cent. Decline in the euro is blamed on quantitative easing programme by the European Central Bank and weak economic fundamentals of Europe. Similarly, the Australian dollar has slipped nearly 26 per cent from 3.4 per cent to 2.5 per cent in December 2019. The Japanese yen has also depreciated by 18 per cent to 29.6 in December 2019.
Similarly, the Indian subcontinent currencies also lost massively versus the dirham with Pakistani rupee losing 83 per cent, the highest, followed by 57.7 per cent decline in the Indian rupee, 23 per cent drop in the Bangladeshi taka and 11.3 per cent dip in the Philippines’ peso.
Antony Jos, executive director of Joyalukkas Exchange, said most Asian currencies have largely depreciated against the US dollar, except the Chinese yuan, in the past 10 years.
“This trend could hold true for the near future as well. A constrained supply of the dollar has managed to keep it strong while the political situation in Europe is not helping the euro at all. The US dollar index is set up in such a way that when the euro weakens, the dollar automatically gains strength,” Jos said in an interview.
According to Raipancholia, in the next 10 years, inflation, interest rate differences between different countries, current and capital account deficits, economic growth, employment generation rate, oil and commodity prices, trade agreements and barriers will dictate the currencies.
Depending on the economic pattern of the countries, Raipancholia noted that the current scenario shows that the US dollar will continue to be a dominating currency for next decade. “There could be other currencies that may gear up but the US dollar would continue to remain on top.”
Jos said trends show that the Philippines peso and Bangladesh taka could get stronger compared to the US dollar and the UAE dirham due to strong industrial policies taken by their respective governments.
“While other currencies like of India, Sri Lanka and Pakistan will show a weakening trend as it will help them compete better in the international markets,” he said, adding that the major factors that affect and will keep affecting currencies are inflation rates, interest rates, political stability and performance, and government debt.
Dollar set to weaken in 2020
Candace Browning, head of BofA Merrill Lynch Global Research, sees the US dollar is weakening in 2020, blaming policy uncertainty. But the British pound will gain on Brexit resolution.
“The US dollar is expected to weaken in 2020 with diminishing policy uncertainty. The euro and sterling also should benefit from a resolution of Brexit uncertainty, with euro/US dollar and the UK pound/US dollar rising to 1.15 and 1.39, respectively. Stronger global growth and a weaker dollar will help support emerging markets,” Browning said.
She expects US dollar/Japanese yen to decline to 103, while Australian dollar/Japanese yen and Asean countries currencies should appreciate sharply on global reflation.
Indian rupee versus US dollar since 1947
It is interesting to note that the Indian rupee was on par with the US dollar at the time of independence in 1947. But it has depreciated 72 times against the greenback in the past 72 years. The rupees was trading at 72.00 per the US dollar in October-November 2019.