Most Middle East and North Africa currencies recorded net selling in May after a brief respite in April, while regional fixed income continued to underperform. The shift came as global inflation expectations rose and United States rate expectations moved higher, pressuring frontier market FX. Only the Jordanian Dinar (JOD) finished May modestly net bought.
The report said sustained carry unwinding weighed on the region’s currencies, and argued energy prices were not acting as a reliable buffer. It added that capital inflows into Gulf economies and Egypt could slow further if Dollar cash yields rise. Separately, the “regional safe haven” narrative for the Omani Rial (OMR) was described as being curtailed as geopolitics increasingly influenced flows alongside geographic considerations.
Carry Trade Unwinds As Dollar Strengthens
The net selling across most Middle Eastern currencies in May looks like the start of a bigger trend we need to act on. With the Federal Reserve holding interest rates at 4.0% and last week’s minutes suggesting no cuts are imminent, the pressure on these currencies will only grow. We believe the brief rally in April was a false signal ahead of further weakness.
We are watching a classic carry trade unwind, where investors sell riskier assets to chase higher and safer yields in US dollars. Recent statistics from the Institute of International Finance show a net capital outflow of $4.5 billion from MENA bond and equity markets in May 2026, the largest monthly drop this year. This flow of money out of the region is likely to accelerate in June.
Energy Prices Fail To Shield Regional FX; Defensive Strategies Favored
Even with Brent crude oil prices staying firm around $92 per barrel, the idea that energy prices can protect these currencies is not holding up. The Omani Rial, once seen as a regional safe haven, is facing significant selling pressure as the pull of high US cash yields overpowers other factors. This pattern is reminiscent of the 2022-2023 period when a strong dollar dominated emerging markets regardless of commodity prices.
Given this, we are positioning for more dollar strength against these currencies in the coming weeks. We are looking at buying call options on the US dollar against the Egyptian Pound and a basket of Gulf currencies. This offers a way to profit from the expected move while clearly defining our risk.
Ultimately, only the Jordanian Dinar showed any resilience, but the buying was too weak to be meaningful. The broader theme is clear: rising US rates are making the dollar the asset of choice. We see this as an opportunity to short regional currencies that are most exposed to capital outflows.
