Fed's rate hike positive for GCC

The impact of the Federal Reserve's rate rise will be broadly positive for the Gulf region. The Fed last week increased its benchmark rate for the second time in three months, this time to a range between 0.75 per cent and one per cent.
The impact of the world's de facto central bank rate hike on the UAE and the GCC more generally will be broadly positive for the Gulf for two key reasons.
First, we may see further dollar weakness, and by implication weaker Gulf currencies, as the Fed declines to raise rates as aggressively as the market anticipates.
Fed chairman, Janet Yellen, had warned earlier this month that stronger US growth justifies a more aggressive stance on interest rate hikes than we have seen in recent years. Yet the so-called 'dot plot' chart, which shows where Fed policy committee members believe rates will be over the coming years, shows no change from the December announcement. The average forecast is at 1.375 per cent for end of 2017, and 2.125 per cent for the end of 2018.
It looks like she was bluffing with her earlier aggressive talk (as she did throughout most of last year), and is happy to be 'accommodative' to support economic growth.
This moderate approach to future rate hikes triggered a fall in the dollar on forex markets, which has dragged down other currencies that are linked in some way to the dollar, such as the UAE dirham. Should the Fed remain dovish, while US inflation and growth continue to accelerate, further dollar (and dinar) weakness is on the cards. Good for Gulf tourism, foreign-owned real estate and other export sectors.
Second, a weaker dollar usually supports commodity prices, and indeed the oil price rallied after the Fed's announcement (helped by news of crude oil inventory decline in the US). If this marks a turnaround from recent falls in the oil price we can expect to see improved confidence in the oil and gas sector and throughout the Gulf economies more generally.
Should the Fed continue to surprise the markets with a softer tone on rate hikes than expected, a weaker dollar and stronger oil prices could help lift the official UAE GDP growth estimate for this year above the 3.5 per cent - four per cent range (from 3.7 per cent last year). However, the introduction of VAT on a wide range of goods may act as a drag on the economy - only time will tell.
 The writer is deVere's International Investment Strategist. Views expressed are his own and do not reflect the newspaper's policy.