Business | Investment
Keeping part of your savings in dirhams could be smart
The recent fall in the value of the rupee emphasises the importance of having a diverse portfolio - panic moves are likely to backfire because of the current instability in the market. In the current scenario, it is better for investors to hold some of their assets in the dirham and wait for changes.
- By Michael Walton, Special to Gulf News
- Published: 00:34 April 5, 2008
Q: I am an engineer who has been working in Dubai for over two years. Given the current weakness of the US dollar and its impact on the UAE dirham, am I better off holding my savings in the local currency than converting into Indian rupees and remitting it?
A: We receive more questions about the comparative weakness of the US dollar than almost any other economic topic.
In 2007, the Indian rupee rose an unprecedented 10.3 per cent against the dollar. Because the UAE dirham is linked to the US dollar, this trend eroded the real value of savings and made it more difficult for people to cover costs and debts back home.
However, currency values change and fluctuate over time. The Indian rupee has weakened 2.65 per cent so far in 2008, in part because of increased global financial uncertainty and interest rate cuts by the US Federal Reserve.
Declining stocks
India is also seeing significant falls on its stock markets.
As the old saying goes, when the US sneezes, the rest of the world catches a cold - and, unfortunately, many expats in the UAE are currently suffering from the symptoms.
So let's look at the current situation.
At present, it seems likely that - despite inflationary pressures - the dirham will remain pegged to the US dollar for the foreseeable future. As a result, the weak position of the dollar will continue to impact the UAE currency.
However, the dollar's weakness won't necessarily work to the advantage of other currencies.
The recent fall in the value of the rupee emphasises the importance of having a diverse portfolio - panic moves are likely to backfire because of the current instability in the market. In the current scenario, it is better for investors to hold some of their assets in the dirham and wait for changes in the market.
There are several scenarios which could work to your advantage in the medium term, so hold back from any dramatic shift in your investment strategy.
One likely trend is that the dollar could rise above the record lows seen in 2007. This may be hard to believe, given the historic fall we've seen in recent years, but the economic slowdown in Europe and Japan could help the dollar recover some of its lost strength, as other global currencies "competitively devalue".
No revaluation
There is also the longer term possibility of the dirham being revalued, which will increase the value of your dirham assets. This is another reason to be cautious - if you moved all your assets into another currency before the dirham revalues, you will lose out twice over.
However, even if revaluation is a long way away, the reality is that the UAE is highly unlikely to devalue its currency, unlike many other markets. As a result, the dirham is something of a safe haven for your savings.
Keeping some savings in the dirham is probably the best move.
Deciding how best to spread your portfolio can be made easier with professional advice. Consider speaking to a professional financial adviser about protecting your wealth.
- The writer is director of general insurance at Nexus, a leading regional financial adviser. The opinions expressed above are the writer's and don't necessarily represent the views of Gulf News.
Please send your questionsto advice@gulfnews.com.
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