US tariffs set to strengthen dirham and other dollar-pegged Gulf currencies

The dirham and other dollar-pegged Gulf currencies are poised to appreciate further against several South Asian currencies, financial experts predict, following a Goldman Sachs report forecasting a "tariff-fuelled boom" for the US dollar.

 For South Asian expatriates in the Gulf,  who sent home more than $120 billion every year, such a possibility of regional currencies appreciating further poses a dilemma: Should they wait to see how tariff-fuelled dollar appreciation against their home currencies would play out in the coming months?

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 Analysts highlight structural vulnerabilities in South Asian economies and the Gulf’s fixed exchange rate regime as key drivers of this divergence.  

  GCC currencies, including the dirham and Saudi riyal, are pegged to the US dollar, ensuring their value moves in lockstep with the greenback. Goldman Sachs anticipates renewed dollar strength driven by potential US tariff hikes on imports, could reshape global trade dynamics. A stronger dollar would automatically elevate Gulf currencies, widening their exchange rate advantage over floating peers like the Indian and Pakistan currencies, which are already under pressure.  

 Goldman Sachs analysts suggest that anticipated US tariffs — potentially targeting Chinese goods under a new administration—could catalyze a dollar surge. “Tariffs may reduce import competition, bolstering US domestic industries and attracting capital inflows,” said John Carter, Global FX Strategist at Goldman Sachs. “This, coupled with the dollar’s safe-haven appeal during trade volatility, could push the dollar index up by 5-7 per cent in the medium term.”  

 The policy shifts by the Reserve Bank of India (RBI)  in managing the Indian currency against the dollar also have significantly impacted the rupee against the dollar, says a report by Union Bank of India.

 The Indian rupee plummeted to Rs87.21 against the dollar and Rs23.902 against the dirham in the first two months of 2025. The Indian currency has already depreciated more than half the depreciation happened in all of 2024. By February 28 the rupee has depreciated by 1.8 per cent against US dollar, this decline is already more than the 1.5 per cent depreciation seen in 2023 and nearly half of the 3.0 per cent depreciation recorded in 2024. Over the past one year, the rupee declined to Rs23.80 in March 2025 from Rs22.515 a year ago against the dirham, down 5.77 per cent.

  “If the dirham appreciates 5.0 per cent, Indian families might see Rs10,000 more per $1,000 sent,” Sajith Kumar P K, group CEO & MD of IBMC Financial Professionals Group, said. He added that such benefits mighty be offset by rising living costs in the Gulf due to dollar-driven inflation.  

  As per the current analysis, dollar index is predicted to touch 109 points and Indian rupee to touch 90 against the dollar. “Higher US import duty in different sectors is hitting Indian exporters, leading to massive exit of foreign Investors from Indian stock markets, weakening the domestic currency. Moreover, the escalating trade war has fuelled risk aversion, propelling safe-haven demand for the greenback,” said Kumar.

  South Asian economies face mounting headwinds. India’s rupee, down 4.0 per cent against the dollar this year, grapples with elevated oil import costs and inflation. Pakistan’s rupee, depreciating over 20 per cent in 2023, contends with political instability and dwindling forex reserves.

  “Dollar-linked Gulf currencies will aggravate these trends. A stronger dirham means costlier imports for India and Pakistan, particularly for energy, which is predominantly sourced from the Gulf,” says a Dubai-based trade analyst Mathen Arackal.

South Asia’s reliance on Gulf oil imports — 60 per cent of India’s needs—poses inflationary risks. “Every 1.0 per cent rise in Gulf currencies could increase India’s oil import bill by $600 million annually,” said Arackal.

 Central banks in India and Pakistan might intervene with dollar sales or capital controls. However, analysts caution that sustained dollar strength could deplete reserves. “India’s $600 billion reserves provide a buffer, but prolonged pressure would test resilience,” said Carter.

Issac John

Staff Writer

issacjohn@khaleejtimes.com

Issac John is Managing Editor at Khaleej Times and has over 45 years of experience in top-tier newspapers across UAE. A seasoned business writer and economic analyst, he brings unmatched insight into the geopolitics and geoeconomics shaping the Gulf and India.