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Dubai: The UAE, conceding to US pressure and a desire to act in concert with Gulf allies, will keep the dirham pegged to the dollar, a UAE Central Bank official said.
US embassy officials last week told UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi of their concern about reports that the country may drop the peg, the official said yesterday, speaking on condition of anonymity.
Political leaders have stopped the bank from developing any plans to move toward another currency regime, the official said. US Embassy spokesman Atalah Hoshan in Abu Dhabi wasn't immediately available for comment.
Abandoning the link would risk further weakening the dollar as the US economy falters and the Federal Reserve battles a crisis of confidence in financial markets.
The Gulf states, including Saudi Arabia and the UAE, depend on the US for political and military backing and are unlikely to abandon their closest ally at a time of financial turmoil, said Anoushka Marashlian, senior Middle East analyst at Global Insight in London.
"The US has always been the guarantor of UAE military security," Marashlian said. "The UAE wouldn't do anything to compromise that relationship."
Gulf central banks are under pressure to drop the peg or revalue their currencies after the dollar lost 17 per cent of its value since the beginning of last year, and the US began cutting interest rates. Still, Hamad Saud Al Sayari, governor of the Saudi Arabian Monetary Authority, said on March 12 the dollar is a "good buy" and is undervalued.
Impact
The Fed's weekend cut in the discount rate accompanied a pledge to provide as much as $30 billion to JPMorgan Chase & Co. to help finance the purchase of Bear Stearns Cos. after a run on Wall Street's fifth-largest securities firm.
The weaker dollar makes imports more expensive while lower rates increase the money supply and stoke inflation. The central bank official gave no indication as to how long the bank will hold off moving toward a new currency regime.
The UAE Central Bank defended its independence, denying any political pressure on its monetary decisions. "This cannot be true, as we have not even heard anything of the sort," a bank official told Gulf News.
- With inputs from Ahmed A. Elewa/Senior Reporter
Policy change: HSBC sees 40% chance
HSBC Holdings Plc said there is a 40 per cent chance Gulf Arab states such as the UAE and Qatar will make changes this year to their dollar-peg foreign exchange policies or risk higher inflation.
"The 40 per cent probability of change taking place this year reflects our view that policymakers could yet have their hands forced in what looks to us to be a brewing perfect storm," Middle East economist Simon Williams wrote in a report.
The storm is a combination of "dollar weakness, falling US rates, high oil earnings and rising inflation," Williams said.
- Reuters
What does this mean for the future of the economy? Will this cause you to change your investment plans?
Your comments
The US calls to the UAE to retain the dollar peg come against the background of the US-central bank, the Federal Reserve, having reduced short-term interest rates for the sixth time in six months on Tuesday. US-president Bush has used the occasion to urge Americans to have confidence in the economy and said he would ask the Federal Reserve to take further action if necessary. Bush thus wants even lower interest rates, thus an even lower dollar and still he wants the UAE to keep the peg. Thank You, Mr Bush.
Ivo
Siquijor,Philippines
Posted: March 19, 2008, 14:42
Well, I believe that we should study the effect of the devaluation of the dollar and its impact on the UAE economy. If the UAE is succumbing to US pressure, then it has to revaluate whose interest it is pushing for. I also agree with Habeeb that if they do not remove the peg then they should are least revalue the UAE dirham to the dollar.
Sharif
Dubai,UAE
Posted: March 19, 2008, 11:40
I agree with Habeeb. Why should the people of the UAE suffer for the excesses of the US? If not depegging at least revaluations are in urgent need.
Jossie
Dubai,UAE
Posted: March 19, 2008, 11:12
We can understand the strong relationship the UAE has built with the US. However, like they say in economics "money has no feelings"; some concrete decision has to be taken to rectify the situation. This could be done by either re-pegging the dirham with a basket of currencies (which could include the US dollar) or at least revalue the currency. If the dollar continues to decline, then the UAE can experience losing professionals to other developing nations that offer better currency prospects. Nevertheless, short-term benefits could be that the tourism industry will boom as the UAE will turn out to be a cheaper destination.
Mohamed
Abu Dhabi,UAE
Posted: March 19, 2008, 11:00
I don't think the UAE and Qatar would depeg from the dollar but at least they should revalue the currency.
Azim
Doha,Qatar
Posted: March 19, 2008, 09:49
The UAE now is like a person with wings thrown into the sea with a huge metal ball chained to his legs.
This will extremely and negatively affect the boom in the region, all the money that's being pumped into the economy in the form of investments, projects, buildings, tourism...etc will lose its value. Costs will spiral out of control, and companies wont be able to accommodate the increase in wages and costs. The UAE now is losing everything Sheikh Zayed and his ilk had worked to achieve in the past 30+ years.
This is a very big mistake.
I think at some point the UAE should thank the US for its protection and support and tell it to back off.
I hope this gets published.
Khaled
Abu Dhabi,UAE
Posted: March 19, 2008, 09:34
I don't understand why UAE, the whole nation, has to suffer what the United States has brought on itself.
Habeeb
Abu Dhabi,UAE
Posted: March 19, 2008, 09:19
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