What a plunging dollar means to Gulf imports and inflation

• Impact on dollar-pegged economies
• Margins could come under pressure
• Gulf countries face a ‘policy dilemma’

The dollar’s slump to multiyear lows against many major currencies risks raising import costs in the dollar-pegged Gulf economies, fuelling inflation and pressuring business profitability, analysts say.

From mid-January, the dollar is down 11 percent against each of the euro (to its lowest in more than three years), the Japanese yen (its lowest since late 2023), the Swiss franc and 9 percent versus the British pound.

Against the Swiss franc – seen as a safe haven currency amid heightened global trade tensions – that is the lowest in 14 years, and against the pound the lowest since October.

The decline matters in the Gulf as the region imports most of its food and many other products such as steel, vehicles, pharmaceuticals, electronics, equipment and machinery.

“A weaker dollar will increase inflation in the Gulf, although it shouldn’t be too significant,” says Mohamed Abu Basha, head of macroeconomic analysis at Cairo-based asset manager EFG Hermes. 

“Margins at some businesses could come under pressure, depending on what they’re importing and where they’re importing from.”

The greenback’s slump coincides with President Donald Trump’s stated aim of weakening the dollar to make the country’s exports more competitive. 

His second administration’s combative and somewhat unpredictable tariff and trade strategy has spurred a dollar sell-off.

More aggressive-than-expected interest rate cuts by the Federal Reserve, which Trump has called for, will create a ‘policy dilemma’ for Gulf countries, says Farouk Soussa, Middle East and North Africa economist at Goldman Sachs in London.

In an inflationary environment, central banks would normally seek to raise interest rates, yet the Gulf must follow US rates due to its dollar peg, Soussa says. 

Of the six members of the Gulf Cooperation Council economic and political bloc, all but Kuwait peg their currencies to the dollar, the same currency in which oil – their main export – is priced. 

Only Kuwait pegs its currency to a still-undisclosed basket of currencies, which certainly includes the dollar and probably the euro too. Kuwaiti currency fluctuation is minimal.

The Gulf’s largest source of imports is China, the world’s biggest manufacturer. China’s currency is near-flat against the dollar this year. 

But the dollar’s decline is likely to make a material difference to import costs from countries such as Japan, the UAE’s fifth biggest source of imports and Saudi Arabia’s sixth. 

Saudi Arabia’s biggest trade partners

Likewise, the eurozone countries of Germany, Italy and France, which in 2023 exported almost $30 billion of goods to the UAE and more than $19 billion to Saudi Arabia, will be affected.

Imports from the UK to the two largest Arab economies – Saudi Arabia leads – amounted to $13.4 billion in 2023.

Even goods from Russia, which is the 14th biggest importer to Saudi Arabia and the UAE, would now cost 25 percent more in dollar terms than at the start of the year, based on rouble appreciation and assuming product prices in roubles are unchanged.

• Trump tariffs threaten $22bn in Arab exports says UN
• Saudi Arabia’s debt burden ‘to rise more quickly’, says IMF
• Global trade war prompts Gulf construction reassessment

Gulf inflation is relatively benign at the moment. For example, Dubai’s annual consumer price inflation fell 0.4 percentage points in March to 2.8 percent, its lowest since October. 

And, though low by international standards, headline inflation in Saudi Arabia hit a 20-month high in March at 2.3 percent, according to government data. Prices of meat and poultry and personal goods and services grew by almost 4 percent.

“There are other concerns around inflation in Saudi Arabia; because of the big push on [infrastructure] investments, there’s a sizable increase in things like housing prices as more people relocate to the country,” says Goldman Sachs’ Soussa. 

“There are bottlenecks on the supply side. That presents a conundrum for the Saudis in terms of how to deal with that given they have no flexibility on interest rates.”