Dubai: If you thought your dirham wasn’t going as far as it used to a year ago, you’re right, but a weaker dirham caused by a weakening of the US Dollar could be very good news for the UAE economy.

With the UAE dirham being pegged to the dollar, analysts said a weaker currency is expected to help the country’s tourism, retail, and real estate sectors.

“Although it was not expected and a lot people bet [the dollar] would get stronger, I think the fact that it got weaker is helping us. Provided this weakness sustains for a longer period of time, we will see that reflected in the tourism numbers. We will also probably see some benefits in the real estate sector especially from international investors … and we’ll see this positive momentum build up in the [real estate] sales,” said Mohammad Yasin, chief executive officer of National Bank of Abu Dhabi Securities.

So far this year, the dollar index, which measures the value of the dollar against a basket of currencies, has dropped around 7.2 per cent, with the dollar now at its weakest level since mid-August 2016, according to Bloomberg data

The currency has been on a decline since late December, after jumping nearly 28 per cent between July 2014 and December 2016.

That increase contributed to a slowdown in the UAE’s tourism and retail sectors as the country became a more expensive destination for many visitors, especially from key markets such as Europe, the UK, and Russia.

“As well as the weakening of the US dollar, we’ve seen strengthening in oil prices over the past 10 days. Those two factors together are extremely important and will have a positive impact on our economy provided they continue for a bit longer. Small movements over a short period of time don’t have as much benefit, so we need this to sustain for a bit longer for the economy to benefit,” Yasin said.

More downside in dollar

And some analysts believe there’s, indeed, more downside to the dollar.

Hussain Sayed, chief market strategist at ForexTime, said he expected the US dollar to fall another 3-5 per cent by the end of this year.

“The fall in the dollar was caused by the Trump’s administration’s failure to repeal Obamacare. Of course, this could mean that tax reforms could be delayed or could never happen, so investors are just losing trust, and we can probably see more weakness in the dollar,” he told Gulf News.

Interest rate hikes

He pointed out that US economic data such as consumer spending, retail sales, and inflation has been relatively weak. For the US Federal Reserve, that could mean delays in their plans to raise interest rates, thus adding further pressure to the dollar.

“A hike in interest rates in the UAE will eventually lead to tighter financial conditions and higher mortgage rates. But if we think that interest rates will remain low for a prolonged period of time, then this is good news,” Sayed said.

The UAE has hiked interest rates twice so far this year (in March and in June), in line with the Federal Reserve’s rate hikes. The Fed had earlier said it plans to raise rates once more this year, with expectations for that to happen either in September or December.

However, recent remarks from Fed officials coupled with recent US economic data have raised doubts on whether there will be another hike this year at all.

Naeem Aslam, chief markets analysts at London-based Think Markets UK, disagreed with Sayed, saying the dollar may be close to bottoming out.

“I think the dollar [index] will continue to be influenced by major macroeconomic factors other than interest rate hikes because the hawkish tone by other central banks will keep the pressure on the dollar.

Yes, investors have scaled back expectations on whether we’ll see another interest rate hike this year. Certainly if we do see that momentum picking up, we’ll see upwards move on the dollar because right now a number of investors are not expecting a rate hike this year,” he said.