Dollar’s surge raises fears of global ‘liquidity shock’

Coronavirus disruption is adding to alarm at the state of the dollar market. (AFP)
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Updated 01 April 2020
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Dollar’s surge raises fears of global ‘liquidity shock’

  • Spike in greenback narrows central banks’ options amid coronavirus fallout

LONDON: If the 2008 financial crisis is any guide, world markets — which have barely had time to recover from the dollar’s 9 percent surge in mid-March — may be set for another damaging bout of strength in the greenback.

In the 10 days from March 9, the dollar leapt against almost every other currency as companies and banks bought it to pay their creditors, trade partners and suppliers. Money market funding rates jumped and share prices plunged as those desperate for the US currency liquidated investments.

Such a spike in the dollar — the currency of choice in global commerce and investment, used in up to 90 percent of all FX transactions — is bad news, as it rapidly tightens financial conditions, exacerbating the very problems that policymakers are striving to prevent.

Since March 23, the surge has faded, as the US Federal Reserve cut interest rates again, injected trillions of dollars into the financial system and opened swap lines with other central banks to ease dollar strains overseas. Currency swap rates have calmed down and equities are rallying again.

But what if this is just a pause rather than a halt to the dollar’s upward path?

Brown Brothers Harriman strategist Ilan Solot, who worked at the Fed in 2008 as a currency trader, is among those expecting another bout of dollar strength.

“Policymakers understand the funding shortage problem well from the previous crisis and they have rushed to solve that, but this crisis could very well see a real economy shock,” he said.

Central bankers have repeated the stimulus playbook of 2008, but “this is a liquidity shock to the real economy, and we don’t know how that will play out,” Solot added.

Like many analysts, he suggests looking at the 2008 crisis.

Through all of 2007 and well into 2008, the dollar index fell steadily as hedge funds ramped up short positions despite growing unease over US subprime mortgages and the collapse of Bear Sterns. But from March to November 2008, the dollar rocketed 24 percent thanks to overseas demand.

And much like recently, money market rates soared.

Then Federal Reserve rate cuts and Washington’s $700 billion bank bailout bill kicked in; as the money market logjam eased, the dollar retreated and troughed on Dec. 18, 2008.

The respite was brief, however. The currency took off again, and rose another 15 percent before peaking in March 2009. That allowed equities and emerging markets to bottom out.

The uncertainty this time is that the twin demand and supply shocks caused by the virus could last indefinitely as millions more are sickened across the world. Companies and individuals trying to stay afloat are likely to hoard cash dollars.

A move higher now would also fit with the so-called Dollar Smile theory. Put forward by former Morgan Stanley strategist Stephen Jen, it holds that the greenback strengthens in tough times as investors rush for safe, liquid assets.

It then falls as US growth flags, forcing Fed rate cuts — the bottom of the smile — before rising again as the US economy leads the global growth rebound.

Jen, who now runs hedge fund and advisory firm Eurizon SLJ Capital, expects the US economy to stage a full recovery by the end of the year, while Europe will reclaim end-2019 levels only toward the end of next year.

“We were on the left side of the dollar smile, but for much of the second half of 2020 and in 2021,
I expect us to move to the right of the dollar smile,” he added.

And even after large rate cuts, dollar assets offer higher yields — the interest rate gap between three-month US and German bills offers a 1 percent return on an annualized basis.

Meanwhile, despite its retreat, the dollar is near the highest since 2002 against trade partners’ currencies, reviving speculation of Treasury intervention to rein it in. But the turbulent times make that unlikely.

“The historic rally is not quite over,” Goldman Sachs said, adding that in a further equity drawdown, there could be another 3 percent-
5 percent upside to the trade-weighted dollar from recent highs.

The coronavirus disruption also comes amid an increasingly fragile demand/supply balance in dollar markets.

For years tighter regulations have constrained US banks’ ability to lend dollars. But the currency’s role in international transactions hasn’t lessened, and that has led to a dollar funding gap — the difference between non-US banks’ dollar assets and their liabilities.

This imbalance may amount to $1.5 trillion a year, according to International Monetary Fund estimates.

Parts of the swap market reflect the unease — three-month dollar-yen swaps are at an elevated 44 bps versus an average 20 bps in 2019.

The FRA-OIS gauge of bank funding costs is at levels not seen since the financial crisis. Market players say that rather than interbank problems, its surge suggests unprecedented demand from companies that are drawing down credit lines and seeking to borrow more from banks.

Ariel Bezalel and Harry Richards, fund managers at Jupiter Asset Management, reckon the global economy is about to enter a period of persistent dollar shortages.

“There are simply not enough dollars going to the outside world at this critical juncture,” they wrote.

Sure, the Fed’s asset-buying, multi-trillion dollar cash injections and swaplines with foreign central banks will help. But it may be running to standstill.

The dollar was involved in
90 percent of currency transactions globally in a $6.6 trillion daily market, BofA noted, adding: “The reality is that the Fed is incapable of equilibrating supply/demand mismatches ... if there is a rush to hold US dollars.”

They predict the dollar index will rise eventually to 120 from the current 102, although they gave no time frame.


Tadawul maintains upward momentum, closes at 12,113

Updated 5 sec ago
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Tadawul maintains upward momentum, closes at 12,113

RIYADH: Saudi Arabia’s Tadawul All Share Index extended its upward trajectory for the second consecutive day on Tuesday, rising by 8.60 points, or 0.07 percent, to close at 12,113.29.

The benchmark index recorded a total trading turnover of SR7.71 billion ($2.05 billion), with 124 stocks advancing, while 110 saw declines.

In contrast, the Kingdom’s parallel market, Nomu, dropped 54.97 points, ending the session at 30,809.12. The MSCI Tadawul Index also gained ground, rising by 3.48 points to reach 1,514.39.

The standout performer of the day was Almoosa Health Co., which made its debut on the main market. The stock surged by an impressive 14.96 percent, closing at SR146. Other notable gainers included Al Mawarid Manpower Co. and Saudi Reinsurance Co., whose share prices climbed by 10 percent and 9.23 percent, closing at SR125.40 and SR63.90, respectively.

On the flip side, Al-Baha Investment and Development Co. saw its share price fall by 4.44 percent, ending the day at SR0.43.

On the announcements front, Filling and Packing Materials Manufacturing Co. announced it had signed a Shariah-compliant credit facility agreement worth SR50 million with Al Rajhi Bank to finance its working capital.

According to a statement on Tadawul, the 12-month credit facility is backed by a promissory note covering its entire value. FIPCO clarified that there are no related parties involved in the agreement. The company’s stock inched up by 0.44 percent, closing at SR45.70.

Meanwhile, LIVA Insurance Co. revealed it had received a Baa2 insurance financial strength rating with a stable outlook from Moody’s. The rating reflects the company’s strong capital adequacy, solid asset quality, and conservative investment strategy, alongside moderate reserve risk.

LIVA emphasized that the rating underscores Moody’s confidence in the company’s enhanced underwriting discipline and its ability to maintain profitability and growth within the Saudi market. A Baa2 rating is considered medium-grade, indicating a company’s acceptable ability to meet short-term debt obligations. LIVA’s stock gained 0.57 percent, closing at SR17.60.


Saudi Arabia eases domestic worker quotas for HR firms

Updated 6 min 39 sec ago
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Saudi Arabia eases domestic worker quotas for HR firms

RIYADH: Human resources firms in Saudi Arabia have welcomed the reform of a rule that required 30 percent of all employees to be domestic workers.

The change to the law, announced by the Ministry of Human Resources and Social Development, means that only firms with 3,000 workers or fewer now have to meet that threshold.

Those with a workforce ranging from 3,001 to 10,000 workers will instead be obligated to maintain a reduced quota of 20 percent, with that level dropping to 10 percent for companies with staffing levels between 10,001 to 15,000.

Firms with more than 15,000 workers are fully exempt from any domestic worker quota.

This policy shift is expected to balance supply and demand in the support workers sector, improving its legislative environment. 

It comes at a time when Saudi Arabia’s human resources management market is experiencing rapid growth, and prior to this decision market research firm Horizon Grand View Research projected the sector would expand by a compound annual growth rate of 11.1 percent from 2024 to 2030.

Companies affected by the changes issued statements on Tadawul welcoming the new rules, with Mawarid Manpower Co. stating that “this decision will have an impact on the company’s business, as it will alleviate the company’s obligation to recruit a specific percentage of the total workforce.”

Similarly, Saudi Manpower Solutions Co., also known a SMASCO, highlighted that “this decision aims to achieve a balance between supply and demand, thereby improving the legislative environment for the support (domestic) workers sector.”

Maharah Human Resources Co., which employs over 15,000 domestic workers, said that “it is not required currently to comply with any percentage for the household workers out of the total workforce.”

The company highlighted the cost-saving benefits of the new system, noting that “it is expected that this decision will have an impact on the company’s long-term business, as it will alleviate the company’s obligation to recruit a specific percentage of the total workforce and reduce recruitment costs for household resources to ensure compliance with previous percentages.” 

Additionally, the firm stated that the amendment “gives the company the ability to increase the workforce in the corporate sector to meet the growing demand without any constraints limiting that.”

The reform reflects Saudi Arabia’s broader efforts to modernize labor laws and streamline operations across key sectors. 


Saudi Arabia sees 45% annual growth in domestic flight bookings: report 

Updated 49 min 54 sec ago
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Saudi Arabia sees 45% annual growth in domestic flight bookings: report 

RIYADH: Saudi Arabia recorded a 45 percent annual growth in domestic flight bookings in 2024, fueled by the Kingdom’s expanding tourism offerings and increased connectivity through low-cost carriers. 

According to Almosafer’s latest travel trend report, domestic room night bookings also saw 39 percent yearly growth. Additionally, combined domestic flight and hotel reservations contributed over 40 percent to the overall travel market, an 11 percent yearly increase. 

The growth in domestic travel is largely driven by a broader range of destinations, accommodation options, and experiences that continue to attract leisure visitors to explore their home country. Family and group travel have been key contributors to this upward trend, with bookings in these segments surging by over 70 percent.

Commenting on the trends, Muzzammil Ahussain, CEO of Almosafer, said: “These travel trends align seamlessly with the government’s vision to enhance in-destination value and increase domestic tourism as part of Vision 2030.”

Cities such as Makkah, Riyadh, and Jeddah, as well as Al Khobar and Madinah, remain key attractions. 

However, emerging destinations like Abha, Al Jubail, and Jazan, as well as Tabuk and Hail, are gaining momentum due to their distinct offerings, including mountain views, beaches, landscapes, and desert experiences. 

“The growth of domestic tourism and the rise of family and group trips, with a focus on unique accommodation experiences and rich in-destination activities, showcase the success of the national agenda of building a thriving leisure tourism sector that contributes significantly to the economy,” Ahussain added.

Almosafer’s report highlights a notable shift in traveler preferences for accommodations. While luxury remains prominent, with 36 percent of room nights booked in five-star properties, budget-friendly stays in three-star or lower hotels now represent 35 percent of total bookings — a segment that has grown 100 percent for families and groups. 

Alternative accommodations such as vacation rentals and hotel apartments have also gained traction, with family bookings rising 90 percent and group reservations increasing 60 percent, reflecting growing demand for flexible and affordable lodging options. 

Low-cost airlines have also played a crucial role in the domestic travel boom. Increased capacity, expanded connectivity, and additional routes have made budget carriers more accessible to cost-conscious travelers. 

While flight bookings grew by 45 percent, the average order value decreased by 7 percent, demonstrating how expanded options are enabling travelers to secure more cost-effective deals. 

In-destination activities have become a cornerstone of travel value, with visitors increasingly opting for guided tours, adventure sports, and cultural experiences. 

Booking behavior also evolved in 2024, with mobile platforms dominating the market. App bookings grew by 67 percent and accounted for 76 percent of total bookings, while web reservations contributed 17 percent, reflecting 7 percent growth. 

Retail bookings, though representing a smaller 7 percent share, remain relevant for complex and higher-value itineraries as travelers seek in-person assistance for personalized planning. 

Flexible payment options have further transformed the travel market. Buy now, pay later plans have gained popularity, while Apple Pay accounted for 44 percent of all domestic bookings processed in 2024, reflecting the growing adoption of digital payment methods. 


Qatar’s non-oil business growth steady in December; Lebanon’s PMI at 8-month high

Updated 07 January 2025
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Qatar’s non-oil business growth steady in December; Lebanon’s PMI at 8-month high

  • Qatar’s labor market was a key driver of the country’s overall progress in business conditions
  • S&P Global added that activity levels across Lebanon’s private sector economy fell in December

RIYADH: The growth of non-oil business activities in Qatar was steady in December, with the country’s purchasing managers’ index remaining stable at 52.9, unchanged from November, an economy tracker showed. 

The latest report released by Qatar Financial Center and compiled by S&P Global said that the headline PMI figure for the fourth quarter of 2024 stood at 52.9, up from 52.0 in the previous three months and above the long-run survey average of 52.3 since April 2017.

According to the PMI survey, Qatar’s labor market was a key driver of the country’s overall progress in business conditions in December, with employment and wage increases reaching some of the highest levels on record. 

The strong growth in non-energy business activities aligns with the broader economic diversification efforts across Gulf Cooperation Council nations, which continue to reduce reliance on oil revenues.

Earlier this month, S&P Global revealed that Saudi Arabia’s December PMI hit 58.4, driven by a sharp increase in new orders. The Kingdom’s PMI has remained above the neutral 50 mark since September 2020, indicating substantial expansion in the non-oil private sector.

In the UAE and Qatar, the PMI for December stood at 55.4 and 54.1, respectively. 

“The headline PMI was unchanged at 52.9 in December, remaining above the long-run trend level of 52.3 and indicating a solid improvement in business conditions in the non-energy sector,” said Yousuf Mohamed Al-Jaida, CEO of QFC Authority. 

According to the report, employment and wages have risen more quickly in Qatar’s non-energy business sector than at any other time in survey history, which reflects efforts to raise output, improve services, win new business, and address outstanding workloads.

Even though wage pressures remained strong in December, overall input price inflation eased further from October’s four-year high. 

The survey added that Qatari firms continued to hold an optimistic outlook for the next 12 months in December, albeit slightly easing from November. 

According to the analysis, Qatar’s Financial Services Future Activity Index rose from 62.1 in November to 68.3 in December, well above the long-run series trend of 63.6.

“The outlook for 2025 is strongly positive, continuing to support a booming labor market. New business growth generated a renewed rise in outstanding work during December, and companies continued to build inventories in expectation of sales growth in the coming months,” added Al-Jaida. 

Business confidence in Lebanon rises

In a separate report released by BLOMINVEST Bank, compiled by S&P Global, the PMI of Lebanon hit an eight-month high in December, reaching 48.8, up from 48.1 in November. 

The survey revealed that companies recorded their most optimistic assessment of the 12-month outlook in December as the Israel-Hezbollah ceasefire buoyed sentiment. 

S&P Global added that activity levels across Lebanon’s private sector economy fell in December, although the pace of decline cooled to the softest seen since March. 

“The BLOM Lebanon PMI for December 2024 improved for the second month in a row from the 44-month low in October (45.0) to record 48.8, as slower declines in new orders and new export orders resulted in a softer output contraction,” said Helmi Mrad, research analyst at BLOMINVEST Bank. 

He added: “It is interesting to note that the surveyed companies were optimistic regarding the 12-month outlook, with the Future Output Index recording an all-time high of 61.8. This optimism is due to the ceasefire agreement between Hezbollah and Israel.” 

According to the survey, the decline in new export business also cooled sharply in December, with the contraction being the slowest in 10 months. This trend also signaled a marked easing of the contraction in international client demand for Lebanese products. 


Up to 50% of deep tech startups in Saudi Arabia focus on AI, IoT — report

Updated 07 January 2025
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Up to 50% of deep tech startups in Saudi Arabia focus on AI, IoT — report

RIYADH: Up to 50 percent of deep tech startups built in Saudi Arabia are working on artificial intelligence and the Internet of Things, a new report revealed.

Released by the Ministry of Communications and Information Technology, in partnership with King Abdullah University of Science and Technology and in collaboration with Hello Tomorrow consultancy firm, the document indicated that there are over 43 high-growth startups driving innovation in the Kingdom, collectively securing more than $987 million in funding.

This aligns with the National Strategy for Data and AI goals to position Saudi Arabia among the top 10 countries in the open data index and among the top 20 countries in peer-reviewed Data and AI publications by 2030.

It also meets with the strategy’s objective of securing SR30 billion ($7.9 billion) cumulative foreign direct investment and SR45 billion local investment in data and AI in the Kingdom by 2030.

“The deep tech startups that have originated in Saudi Arabia are currently in their early stages of development, but the ecosystem is already attracting mature international companies,” the report said.

On the $987 million secured funding in 2022, the report said this was primarily fueled by a rapidly expanding funding ecosystem, which was ranked in the Middle East and North Africa’s top three for funding and deals.

The report further disclosed that 104 active startup investors registered in the Kingdom in 2023, a 41 percent increase from 2018.

“This expansion is highly dependent on public funds, as the government is committed to nurturing tech startups and scaleups,” the reports said.

It added that the number of researchers in Saudi Arabia has risen by 75 percent since 2015, thereby cementing the nation’s commitment to advancing research and development.

“The country is expanding its research infrastructure to accommodate 140,000 researchers by 2030, marking a sevenfold increase from the current 20,000 researchers in the country,” the report said.

The report tackles the current state and future opportunities of the deep tech ecosystem in the Kingdom as well as key initiatives supporting the goals and objectives of Saudi Vision 2030.

It also seeks to shed light on the prospects and potential in this vital sector which is recognized as a cornerstone for advancing the digital economy and sustainable development as a whole.