The likelihood that the UAE will move away from the dollar peg to a basket of currencies has increased, following the comments made by the Central Bank governor, Sultan bin Nasser Al Suweidi in South Korea yesterday.
Speaking to Bloomberg, Al Suweidi said: "It's not my prediction but everybody is expecting that the US dollar will go down further. It will trigger a review." He also said that the plan is "not to drop the dollar-peg but maybe to reduce it to a basket which will consist of more dollars, but not totally 100 per cent"
Moving away from the dollar peg is seen as necessary in order to mitigate imported inflation, especially from Europe. Some estimates put inflation in the UAE at 12 per cent per annum while others suggest it is much higher. The dollar has lost 10 per cent of its value against the euro so far this year, dropping to a record low of $1.4752 on November 9.
Suweidi continued to reinforce his position that the UAE would not break ranks with its neighbours as Kuwait did in May when it switched from a dollar peg to a currency basket. It cited inflationary pressure as the reason for the decision.
However, Deutsche Bank economist Caroline Grady, quoted by Bloomberg, said: "Although the UAE has said that it doesn't intend to unilaterally abandon the long-held dollar peg, we don't rule out a move without the rest of the GCC." Heads of state from the GCC will meet on December 3 and 4 in Qatar to discuss monetary policy and regional security.
One reason why the GCC states have been reluctant to move away from the dollar peg is because oil sales are denominated in US dollars. Another is because the region's sovereign wealth funds, worth about $2 trillion, have invested heavily in US Treasury bills. The falling value of the US dollar is forcing these funds to diversify their holdings.
The news means that investors are betting on a larger appreciation of the UAE dirham. According to Reuters, yesterday morning, one-year dirham forwards had appreciated 2.45 per cent to 3.5826 per dollar. Source
Speaking to Bloomberg, Al Suweidi said: "It's not my prediction but everybody is expecting that the US dollar will go down further. It will trigger a review." He also said that the plan is "not to drop the dollar-peg but maybe to reduce it to a basket which will consist of more dollars, but not totally 100 per cent"
Moving away from the dollar peg is seen as necessary in order to mitigate imported inflation, especially from Europe. Some estimates put inflation in the UAE at 12 per cent per annum while others suggest it is much higher. The dollar has lost 10 per cent of its value against the euro so far this year, dropping to a record low of $1.4752 on November 9.
Suweidi continued to reinforce his position that the UAE would not break ranks with its neighbours as Kuwait did in May when it switched from a dollar peg to a currency basket. It cited inflationary pressure as the reason for the decision.
However, Deutsche Bank economist Caroline Grady, quoted by Bloomberg, said: "Although the UAE has said that it doesn't intend to unilaterally abandon the long-held dollar peg, we don't rule out a move without the rest of the GCC." Heads of state from the GCC will meet on December 3 and 4 in Qatar to discuss monetary policy and regional security.
One reason why the GCC states have been reluctant to move away from the dollar peg is because oil sales are denominated in US dollars. Another is because the region's sovereign wealth funds, worth about $2 trillion, have invested heavily in US Treasury bills. The falling value of the US dollar is forcing these funds to diversify their holdings.
The news means that investors are betting on a larger appreciation of the UAE dirham. According to Reuters, yesterday morning, one-year dirham forwards had appreciated 2.45 per cent to 3.5826 per dollar. Source
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