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Trump-Powell tussle: Will the GCC states be affected?
Since most of the region, including the UAE, maintain a currency peg to the US dollar, any changes to American monetary policy will have a direct impact here
- PUBLISHED: Mon 12 Jan 2026, 5:22 PM
Investors around the globe were rattled on Monday as the tussle between US President Donald Trump and Fed Chair Jerome Powell went beyond rhetoric, with the US attorney’s office in the District of Columbia opening a criminal investigation into Powell, over the central bank’s renovation of its Washington headquarters.
According to Reuters data, S&P 500 and Nasdaq futures were both down more than 0.6 per cent ahead of the US market open, with the VIX ‘fear gauge’ up the most since November and gold - which investors buy as a hedge against both turmoil and inflation - hitting $4,600 an ounce.
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With the US central bank’s independence, once considered sacrosanct, now called into question, investors now worry about a wider global fallout. This is especially true of the Gulf Cooperation Council states, most of whose currencies are pegged to the US dollar and thus closely mirror US monetary policy.
“We had already expected that the Fed would remain challenged by pressures from the White House and that in 2026 there would effectively be “two Feds”; the current Fed with Powell as chair and a post-May Fed when a new chair is appointed. Public dissents among policymakers were already obfuscating the Fed’s messaging on the economy and this new threat to Fed governance from the government will further cloud the Fed’s freedom of action,” Edward Bell, Acting Chief Economist and Group Head of Research at Emirates NBD, said in a note on Monday.
Market participants speculate that this development is likely a retaliatory move for not lowering interest rates fast enough. Powell’s term ends in May 2026, and Trump will announce his successor this month. Trump is likely to appoint someone who mirrors his preference for swifter monetary easing. This has reinforced concerns about political interference that could jeopardise the Fed’s independence and credibility. “If this situation is not resolved soon, it could lead to more market volatility, a higher equity risk premium, and a further weakening of the greenback. We could also see greater inflows into safe-haven instruments such as precious metals and treasuries,” Vijay Valecha, chief investment officer, Century Financial, told Khaleej Times.
As GCC economies maintain for the most part pegged currencies to the US dollar, regional policy rates move in step with the Fed. Lower rates last year from the Fed were followed by central banks in the region and we expect that the Fed will cut another 75bps in 2026 and that regional banks will follow. “Activity indicators for 2025 show that the economies of the UAE and Saudi Arabia had been performing well even with rates at higher levels so another move lower in rates will be welcome but unlikely to materially accelerate growth for either economy,” Bell said.
While the GCC countries are considerably insulated from global policy uncertainty, some short-term impact is likely to be felt across certain market segments. This is especially because all GCC currencies, barring the Kuwaiti Dinar, are pegged to the US Dollar. “We can expect strong opposition to Trump’s nomination of Powell’s replacement, which could further increase market risk premiums,” Valecha said.
If Fed policy uncertainty spikes further over the coming days, it could affect rate-sensitive GCC sectors such as banks, real estate, and dividend payers. “The prospect of further monetary easing could boost demand for high-dividend yields, such as those offered by prominent companies in the GCC. Similarly, expectations of a decline in regional funding costs could create demand for real estate developers and REITs, especially as mortgage rates could also fall. While lower interest rates tend to pressure banks’ NIMs, any negative impact could likely be mitigated by increased lending activity. The GCC’s sound political climate and business-friendly policies are attracting individuals and companies to the region, creating demand for credit and borrowing,” Valecha said.
A weaker US dollar, and by extension weaker GCC currencies, has both positive and negative outcomes for regional economies, Bell stressed. “Imported goods become more expensive but non-oil exports, and in particular services exports, become relatively more competitive. The origin of the region’s imports also contains a high share from markets like India and Turkey where the currencies depreciated against the US dollar (and UAE dirham and Saudi riyal) in 2025, offsetting to a degree the rise in other currencies,” Bell said.
That being said, GCC investors should prepare themselves for increased volatility across asset classes. “If markets start pricing in more political influence over the central bank’s decision-making, then it could cause wild swings in global yields. Short-term yields might fall due to rate-cut expectations while long-term yields might rise, thereby steepening the yield curve. Fed funds futures are already reflecting a marginal increase in rate-cut probabilities for the year,” Valecha said.
Investors in the GCC should manage risk by diversifying portfolio returns, analysts say. “Exposure to high-risk momentum plays or cyclical stocks should be balanced by including high-quality, stable defensive components. Also, a liquidity buffer should be maintained to take advantage of any corrective dips through dollar-cost averaging,” Valecha said.
Overall, the region’s capital markets are resilient, with adequate breadth, liquidity, and long-term fundamental drivers. “If policy uncertainty causes a temporary decline in foreign investor inflows into the region, then a short-term wobble can be felt in the domestic indices. But strong long-term fundamentals are likely to come back into focus, supporting the broader uptrend,” Valecha said.
Elevated rates on the long end of the US curve will keep upward pressure on borrowing costs for the region, “though an overall strong credit profile in economies like the UAE and Saudi Arabia and strong investor demand for regional issuances will help to keep spreads contained”, Bell said.
Somshankar Bandyopadhyay is a News Editor with more than three decades of experience. Currently, he manages the news production of the business section, ensuring that the top economic and business news of the day reaches its readers.
