Dollar Weakness and Rate Cuts: The Gulf’s Coming Adjustment

The exceptionally muscular approach of President Donald Trump towards economic policy has revealed itself in direct efforts to undermine the independence of the Federal Reserve.

 He has made open personal criticisms of the chairman Jay Powell, and made overt attempts to have Lisa Cook, a member of the Board of Governors of the Federal Reserve, removed over an allegation related to a mortgage application.

In addition to the issue of whether his criticisms and actions are justified in terms of domestic politics, there are global implications to his actions and the direction of policy, with a particular impact on Gulf nations.

President Trump’s strategic objective on economic policy is to oversee a devalued dollar, reduced trade deficits, and onshoring of production. 

A lower interest rate, for the short and medium term at least, is a central part of this policy, in addition to tariffs, so he has been frustrated that the current Board of Governors at the Federal Reserve has not made a reduction in 2025, following the three cuts totalling 100 basis points, between September and December 2024.

The Federal Reserve has considered inflationary pressures to be too significant to justify a cut, but the pressure is growing, moreover Jay Powell’s term comes to an end next year, and the successor regime is likely to have a more dovish approach. It is likely that there will be two or three cuts this year. 

This, combined with continued rise in public debt, amount to an exceptionally loose fiscal policy. On the day after President Trump confirmed his intention to seek the removal of Lisa Cook, yields on long-dated US Treasuries rose significantly, confirming that while domestic checks and balances to his policies are weakened, he cannot avoid having to placate the international bond market.

For the Gulf nations, there will be significant and direct effects. Most Gulf nations, including Qatar, have currencies that are pegged to the dollar. The Qatar Central Bank will effectively have to follow interest rate cuts by the Federal Reserve, and the riyal is set to depreciate in value against the Euro and Renminbi.

The current interest rate in Qatar is 5.1%, higher than the US rate of 4.25-4.5%, and the Qatar Central Bank would like to reduce the gap. If the Federal Reserve cuts rates by 50 basis points this year, I would expect the Qatar rate to be 60 basis points lower.

There will be a stimulus effect to this. Reduced returns for cash will stimulate business investments, and there is set to be a particularly positive impact on the real estate sector.

On the downside, there are risks to inflation. Qatar imports around 90% of the goods that it needs, so as the effective cost rises as the riyal declines in value, imported inflation is likely to feature. 

While many invoices are in dollars, if the euro, renminbi and rupee appreciate in value against the dollar, costs in those currency areas will rise and the cost is likely to be passed on.

This means that policymakers in Qatar will have to rely on measures other than the principal interest rate to curb inflation. This policy should be easier to implement than a decade ago, when inflationary pressures were also significant. 

This was because the state was embarking on a significant program of public sector investment, primarily to modernise infrastructure ahead of the 2022 FIFA World Cup. That phase is now complete, so the economy should be able to absorb additional stimulus without significant inflation rises, but it will be a feature to manage.

Another side effect of Trump’s policies is appreciation of tangible assets, as the value of fiat currencies falls. Gold has appreciated considerably, and has been stockpiled by central banks, including China’s. Holdings of gold by central banks now represent a bigger share than US Treasuries, for the first time since 1996. The price of gold leapt from around $2,500 per ounce in late 2024 to above $3,600 by September 2025.

Other precious metals, as well as land, real estate and rare earth metals, are also likely to appreciate in value, or stay at an elevated level. Oil and gas prices will likely also rise, to the advantage of the Qatar exchequer as liquefied natural gas (LNG) is the primary export.

There should be bullish prospects also for Qatari equities. The stimulus promises growth and with a downward nudge in the value of the riyal, they may appear cheap.

To an extent, President Trump is achieving his policy aims: the dollar is declining in value – down around 11% in the first half of 2025 – tariff receipts have increased, interest rates are likely to be forced down.

The risks to the US are considerable, however, as a long-term decline in the value of the dollar combined with high and rising public sector deficits and debt can cause instability and nervousness in the bond markets. 

An independent Federal Reserve had an uneven record on curbing US inflation, but if there is little concerted effort to keep it under control, we may be heading for uncharted territory. Outcomes for Gulf states, however, may be surprisingly benign.