The forex market is going through unprecedented volatility due to the aggressive monetary policies of major Central Banks. The US Federal Reserve raised rates by 75 basis points in the last policy meeting, the highest increase since 1994.The Bank of England decided to raise interest rates at all of its meetings this year, bringing its policy rate to 1.25 percent in June. The European Central Bank is expected to increase interest rates in July for the first time in 11 years.
Despite aggressive rate hikes from central banks worldwide, the US Dollar continues to reign supreme. The Dollar Index, which measures the value of the Greenback against a basket of currencies, has surged to two-decade highs this year. As a result, the Indian Rupee and Pakistani Rupee fell by 6.80 per cent and 22 per cent, respectively, year to date. Moreover, markets are beginning to price in Fed rate cuts by the second quarter next year, which means we could see the peak US interest rate by the end of this year.
At the current market price, all the factors that account for Dollar bullishness seem to be priced. And arguably, the currency is overvalued, with Euro/USD itself falling by 11 per cent. As a result, it is quite possible that global risk sentiment can improve during the third quarter, and the Dollar could stall since it is considered a safe-haven. Already, Russia has assured that it will restart natural gas supplies to Europe, and this decision should help stabilise energy prices and reduce the import bill for India and Pakistan.
In the case of Pakistan, it has $1.7 billion (Dh6.24 billion) of debt payments due in December. However, the latest reports indicate that the IMF could release $1.2 billion of funds, while friendly countries could support it with another $4 billion. This new arrangement will help Pakistan avert a default that will support the currency soon. On the other hand, in India, the Rupee was pressured to widen the current account deficit and foreign institutional selling in the share market, totalling more than $30 billion this year. Nevertheless, the Rupee from now could be held steady by RBI interventions as it has approached the critical level of 80 per dollar. RBI moves are supported by India's forex reserve of $580 billion. So it would be opportune for UAE residents to make use of the attractive exchange rates and send some savings to their respective countries.
Meanwhile, gold has fallen to its lowest in almost a year as investors expect interest rate hikes by major central banks to curb soaring inflation. The yellow metal has been volatile this year, rallying to a near record above $2,000 an ounce in March after Russian of Ukraine, only to lose 19 percent since then as the Federal Reserve tightened monetary policy. The Greenback soared on Fed funds rate, recession fears and haven demand. Clearly, the Dollar has been the dominant safe-haven driver here. The same was reflected in gold-backed ETF outflows, with holdings falling for the 16th straight day to 101.79 million ounces.
Major Wallstreet firms also flagged a potential drop in Gold to around $1,600 at some point in 2022 before recovery in 2023. The metal is trading modestly above the crucial support of $1670-1680, and a break below this level could result in deep losses, with the last line of defence seen near the 200-week MA near $1655.
At the moment, Gold seems to be negatively biased as geopolitical concerns are expected to wane by the end of the third quarter. At the same time, the non-interest-bearing yellow metal has not reflected the high-interest rates across the world. So, it could witness more weakness in the coming quarters despite economic slowdown.
— The author is the Chief Investment Officer at Century Financial
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