As the United Arab Emirates Dirham (AED) is pegged to the US Dollar, the currency advanced on several of its peers on Tuesday as the US released encouraging ecostats.
The odds of the Federal Reserve increasing interest rates in the summer of 2015 declined after last week’s slightly dovish commentary from the Federal Open Market Committee (FOMC). However, stronger-than-anticipated US inflation data then put the adjustment of borrowing costs by the middle of this year back on the table and boosted the ‘Greenback’ in the process.
The US Consumer Price Index had been expected to hold at -0.1% on the year in February. However, it actually rose to 0.0%. The core measure of inflation also showed improvement by rising from 1.6% to 1.7% year-on-year.
This comparatively positive set of figures was followed by an unexpected uptick in the US Markit Manufacturing PMI. The gauge of the US manufacturing sector had been expected to ease from 55.1 to 54.6 in March but it actually increased to 55.3.
Initially, these reports were seen to support the case for interest rates being revised in the months ahead and both the US Dollar and AED advanced.
However, any US Dollar gains were trimmed in the wake of comments issued by Fed official James Bullard. The chief of the Federal Reserve Bank of St Louis insinuated that markets need to be on the same page as the Federal Open Market Committee when it comes to the timeline for increasing interest rates or else deal with a potentially ‘violent’ fallout when rate hikes do occur.
Bullard stated; ‘Zero interest rates are no longer appropriate for the US economy. If we don’t start normalizing monetary policy we’ll be badly behind the curve two years from now. I think reconciliation between what markets think and what the committee (FOMC) thinks will have to happen at some point. That’s a potentially violent reconciliation and I am concerned about that.’
As the week progressed the US Dollar to Dirham exchange rate was trending in a fairly narrow range, moving between highs of 3.6730 and lows of 3.6720.
The British Pound to Dirham exchange rate rallied from Tuesday’s low of 5.44 to trade in the region of 5.47.
The GBP/AED uptrend was aided on Wednesday by the release of stronger-than-expected UK BBA Loans for House Purchase data.
If the rest of the week’s US reports (including Wednesday’s Durable Goods Orders numbers and Thursday’s Markit Services/Composite PMIs) up the odds of US borrowing costs being adjusted in June rather than September, the US Dollar may push higher before the weekend and take the Dirham with it.