Talk of higher US interest rates raises prospect of stronger dirham

US policymakers have raised the prospect of a further rise in interest rates "fairly soon" in a move that could lead to a stronger dirham.
Minutes of the most recent Federal Reserve rate setting meeting, released late on Wednesday, raised expectations that the next rise in rates will come before the summer.
That could provide further support to the dollar and the dirham, which is pegged to it. A strong dirham hurts exporters and sectors such as tourism and retail, where the purchasing power of visitors is eroded.
"Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labour market and inflation was in line with or stronger than their current expectations," the Fed said in the minutes.
Economists have warned that the monetary tightening resulting from higher interest rates would affect growth across the region, with local businesses less able to access bank credit.
"Clearly it would provide a little bit of a headwind to the growth potential of any country with interest rates that are dependent on the US," said Tim Fox, chief economist and head of research at Emirates NBD.
But the risk of higher rates should not be overstated, he said, with businesses having had time to prepare ahead of time and large domestic projects bolstering growth.
"If they’re telegraphed in advance then businesses have time to prepare," said Mr Fox.
"There are big projects under way that have to happen by a certain time and those are the outweighing factors that keep us relatively optimistic."
Analysts have warned that a strengthening dollar will also further negatively impact tourist numbers in the UAE. "It adds to the challenges that are being faced, but I don’t see it as insurmountable," Mr Fox told The National, speaking on the sidelines of the Middle East Investment Conference in Abu Dhabi on Thursday.
"Tourists come to the UAE from all over the world; if one currency is weak then it can potentially be replaced by visitors from another part of the world where the currency is stronger."

Source: The National