The most recent decline in the US dollar has sparked robust interest among investors in the United Arab Emirates (UAE) and the Middle East. Moreover, regional investors are reviewing their portfolios to benefit from the emerging risks and decrease risks due to the US dollar weakening.
This decline could significantly influence investment strategies, currency exposure, and return on the assets if this trend continues. In this post, we are going to talk about the decline of the US dollar. Moreover, we will provide you with expert advice to use this trend for your benefit.
Why is the US Dollar Weakening?
There are several reasons that contribute to the drop in the US dollar. We have listed the top reasons that could be behind this change below:
- US Tariff Shock Weakens Economic Confidence
The Trump administration announced the tariff on imports from most nations. However, it affects the world’s confidence in the world largest economy country i.e, the US. The announcement caused a loss of more than $5 trillion from the S&P 500.
Moreover, the US Treasury also sees a clear-out, which decreases the cost and pushes the cost of the US borrowing. Later, the President declared 90 90-day tariff pause, excluding the Chinese importers, on April 9. However, the tension between China and the US on trade has eased now. Still, investors are more careful with the dollar-related asset.
- OECD Slashes US Growth Forecast
A downward revision by the OECD has lowered the projected US growth for the year from 2.2 percent to 1.6 percent. The authority announced this development last month, even after the inflation in the nation had slowed down.
- Trump’s Big Bill and Rising Debt Concerns
Republican leaders are trying hard to pass the Trump One Big Beautiful Act through Congress before the 4th of July. This bill is expected to extend the tax cuts with a sharp drop in healthcare and welfare spending, but an increase in borrowing.
A few legislators believe that it could take until August to pass the bill. Moreover, the focus of this act would be to increase the borrowing limit on the nation’s $36.2 trillion debt pile. However, the non-partisan Congressional Budget Office reveals that this bill could increase the federal debt by $3.3 trillion by 2034.
This data shows that it would significantly increase the debt-to-GDP ratio from 124% today. In addition, it could raise concerns about the sustainability of long-term debt. Moreover, projections show the annual budget deficit increasing from 6.4% in 2024 to 6.9% of GDP.
Till now, trump effort to decrease spending through the Department of Government Efficiency of Elon Musk has failed to meet its expectations. However, the import tariff has boosted the revenue for the nation. Still, the burden of cost has shifted to the USS customers.
- Impact on the US Dollar and Interest Rates
Trump’s unpredictable policies have significantly affected the demand for the US dollar, particularly after Moody’s downgraded the government credit rating in May. It has slowed the growth of the country and affected the demand for its currency.
UAE & GCC Investors Face Dollar Dilemma
The US dollar in the UAE could experience a further drop in 6 to 12 months. However, the US stock market is reaching too high because the new budget is being approved. So, the UAE and GCC investors should consider the weakening dollar in their plans.
A report from Standard Chartered stated that investors should consider the ongoing dollar weakness against other currencies. It is mainly due to the concern about the US growing budget shortage and the potential return of high inflation.
What should you do now?
The Standard Chartered report revealed that we predict the US dollar to weaken further. So, we have updated Asia equities and Emerging Market (EM) local currency bonds to an overweight. The report also mentioned that global equities additionally remain at a high across portfolios due to easing trade conflict, controlled inflation, and good earnings.
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