Dubai: The UAE Central Bank Governor yesterday hinted at a potential change in the UAE's exchange rate policy currently anchored on fixed peg against the US dollar.
"The dirham's peg to the US dollar has served the economy of the UAE very well in the past. However, we have reached the crossroads now with a further deterioration in the US dollar and expected further weakening of the US economy," Reuters quoted Sultan Bin Nasser Al Suwaidi as saying in Tokyo yesterday.
Analysts saw the statement as a clear shift in central bank's stand on the peg.
"The increasing frustration with the decline of dollar and domestic inflation could lead to a more flexible exchange rate policy including a move to a currency basket," Monica Malek, an economist with EFG Hermes, told Gulf News.
The sharp decline in the exchange rate of dirham against most leading international currencies have resulted dirham losing its value in the range of 16 per cent and 20 per cent against currencies such as sterling, rupee and euro during the past two years.
While the decline in exchange rates and domestic inflation above 9 per cent is wiping out a significant share of expatriates' earnings, the reduced purchasing power of dirham has also fuelled higher inflation through rising import costs.
Despite this, the UAE was forced to cut interest rates by 0.6 per cent this year following the US interest rate cuts of 0.75 per cent, fuelling further inflation.
"We continue to hold a long dirham and Kuwaiti dinar versus short dollar in our discretionary portfolio," said Emma Lawson, a currency strategist with Merrill Lynch.
Simon Williams, an economist with HSBC, told Gulf News that although the governor's statement is a bold one, a unilateral decision by the UAE is unlikely.
The GCC heads of state are set to meet next month where a collective decision is expected. EFG's Malek said the UAE is clearly the next in line for currency reforms and sees a probability of more than 40 per cent in the second half of 2008.
Your comments
Please change ASAP. People are suffering. They have come here only to make more money from this vibrant economy with tax benefits, so they can serve their families back at home better.
The current rate of inflation has left most to question their decision, while some countries from where these expat employees come are booming. Inflation in UAE is only making their decision to work here harder. People will leave if this does not change. And that will affect the economy much more then lifting the peg.
After all it is the collective effort of all the expat and local population that is driving the country. So everyone's interest has to be considered.
Darshan
Abu Dhabi,UAE
Posted: November 14, 2007, 08:24
The time is ripe for a big step forward in the right direction. UAE has to do away with dollar peg now.
Harry
Dubai,UAE
Posted: November 14, 2007, 08:13
It is time to change the pegging of AED against US $.The value of AED is going down and down and it is advisable to fix the exchange rate based on mid-2005 rate for major currencies.
Dinesh
Dubai,UAE
Posted: November 14, 2007, 08:00
This hint should be converted into the final collective decision at the earliest possible to improve the purchasing power, reducing the import cost in general and to make our (UAE?s) economy stronger and dynamic.
Ghulam
Dubai,UAE
Posted: November 14, 2007, 07:38
Currency of a country linked to any particular currency of a developed country like USA or UK is not a healthy sign when the value of that falls sharply, obviously the currency in concern loses its intrinsic value. This causes import to cost more while exports in terms of another country will be easier/cheaper. It means all import goods will be costlier to UAE local population. That is what we see a hyper inflation. The people in UAE feel the pinch of high price of consumer goods to automobiles. In the long run it is not good sign of growth. As certain fixed income groups will lose their investment capabilities we will only see the impact after a couple of years from now.
We cannot rule out recession like 1980s if the Central bank does not take steps now to rectify this problem before it is too late.
Dr. Altaf
Sharjah,UAE
Posted: November 14, 2007, 05:33
Yes, expatriates living in Dubai are feeling the pinch. My sister lives there and she and her husband cannot afford to live there because rents are higher; her kids? school tuition fee is higher. So she has decided to return. Many of my friends have the same problem.
Sam
Delhi,India
Posted: November 14, 2007, 04:15
