Business | Economy
Expectations of revaluation rise
The dirham came under heavy speculative buying yesterday as banks and importers opted to convert substantial amounts of dollars into dirhams on expectations that the UAE is likely to revalue its currency.
- By Babu Das Augustine, Banking Editor
- Published: 00:23 September 25, 2007
- Image Credit: Kiran Prasad/Gulf News
- Although divergent monetary policies and the dollar peg have co-existed in the Gulf, it is the first time a structurally weak dollar is testing the sustainability of peg in the context of mounting inflation.
Dubai: The dirham came under heavy speculative buying yesterday as banks and importers opted to convert substantial amounts of dollars into dirhams on expectations that the UAE is likely to revalue its currency.
Several bank treasuries confirmed yesterday that they were selling dollars, with the total volume in the market ranging between Dh15 and 20 billion.
Treasurers said the sustained buying saw dirham bids climbing to a five-year high of 3.6685 per dollar, the strongest since November 2002.
Although the gains were not significant in the cross-currency exchange rates, the growing demand from banks and finance firms are viewed as an indication that the dirham is heading towards revaluation.
"The banks seem to know something that others don't. There had been consistent dollar selling by banks on Sunday and yesterday," said the treasury head of a leading Dubai-based corporate house.
The UAE Central Bank did not comment on the heightened market speculation. The UAE and Kuwait were quick to cut interest rates following a 50 basis points rate cut by the Federal Reserve on September 18.
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The UAE cut one-week CD rates to 4.6 per cent from 4.75 per cent and the one-month CD rate to 4.70 per cent from 4.85 per cent.
Currency market players will take a significantly lower rate cut by the UAE as a hint towards a divergent monetary policy, which could eventually lead to a revaluation or depegging from the dollar.
Forecast
"We still believe that the UAE is the country most likely to move next after Kuwait with regards to currency reform. We forecast a 15 per cent probability of the move this year, increasing 40 per cent in 2008," said Monica Malik, an economist with EFG-Hermes.
Although, Kuwaiti dinar is not pegged to the dollar, Kuwait central bank cut the key rate by 50 basis points. However, it allowed the currency to appreciate 0.27 per cent on Sunday. Other GCC States so far have refused to cut interest rates, which has increased speculative buying in Saudi and Qatari riyal.
Analysts said yesterday that the refusal of as many as four GCC states that have pegged currencies to follow the US rate cut is an indication that a revaluation could be in the offing. Speculation that Saudi Arabia might ditch its peg fuelled buying of the riyal on Thursday and Friday, pushing the spot rate to 3.7362 on Friday, its strongest since December 1986, according to Reuters data.
Although divergent monetary policies and the dollar peg have co-existed in the Gulf, it is the first time a structurally weak dollar is testing the sustainability of peg in the context of mounting inflation. The UAE and Qatar are facing domestic inflation at 9.3 per cent and 11.3 per cent, respectively.
"If the GCC governments are serious about containing inflationary pressures, they will have no choice but to carve out some independence in monetary policy to break from US rates," said David Lubin, economist at Citigroup, in a research note.
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