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Dubai: The decline of the dollar against major international currencies such as the euro and sterling has hit bottom, and the greenback is likely to recover slowly on a volatile trajectory, which could mean relief to Gulf economies hit by surging money supply and inflation, according to economists.
"Currencies such as euro and sterling are overvalued against the dollar. The successive US interest rate cuts increased this gap, so that now euro is estimated to be overvalued by nearly 40 per cent against the dollar. Eventually, the dollar will adjust against these overvalued currencies, which will be reflected in the relative exchange rates," said Michael Hasentab, Senior Vice-President, Co-Director/Portfolio Manager, Franklin Templeton Fixed Income Group.
Although the dollar is hugely undervalued against the euro, he said, against some of the Asian currencies such as the yuan and yen it could still be overvalued and has potential for further decline. Thus the relative adjustments in exchange rates may actually be reflected only over the next two to three years.
Overall, analysts are optimistic about the Fed's statement last week, which hinted at a pause in interest rate cuts for the time being. In addition to the end of the interest rate cuts, the market consensus is also forecasting that the dollar will strengthen in the third and fourth quarter this year.
"For the GCC this will mean the end of the painful easing cycle which the regional countries have had to follow owing to their dollar pegs and the speculation of currency reform. Regional rates will continue to follow US rates on the whole and will remain on hold alongside US rates. This will provide much-needed respite for the GCC economies, which are booming and facing strong money supply growth," said Monica Malik, Director of Economics at EFG Hermes, a regional investment bank.
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