Shaky dollar threatens UAE stability, exit dirham US dollar peg?

Published on January 10, 2011 by   ·   No Comments
Shaky dollar threatens UAE stability, exit dirham US dollar peg

The United Arab Emirates (UAE) needs to develop an exit strategy from its US dollar peg against the UAE dirham, to guard against potential currency shocks in the future, says a Dubai Government economist.

Further falls in the value of the dollar could threaten the country’s economic performance, said Abdulrazak al Faris, the chief economist of Dubai Economic Council. “If we have a crisis in the dollar it will raise questions,” he said yesterday. “Even though we may not move away from the dollar in the foreseeable future it’s important to have an exit strategy so we know what to do if a crisis happens.”

Mr al Faris was speaking in Dubai at the launch of a book he has co-edited about currency issues affecting the GCC. Members of the Central Bank, the Dubai Government and other economists attended the event.

Speaking afterwards, however, Saif al Shamsi, the senior executive director of the Central Bank’s Treasury Department, reiterated recent comments by the Governor Sultan al Suwaidi that the dirham’s link to the dollar would remain.

Debate about the future of the fixed exchange rate regime has intensified in recent months as world economies have become caught in the crossfire of a battle raging between the two leading economic superpowers about the value of each other’s currencies.

At the heart of the dispute is an accusation by the US that China is deliberately keeping its currency low to boost exports. China says the US is to blame for manipulating markets by printing dollars.

Some economists have urged the UAE and other GCC economies with dollar links to re-examine their pegged regimes to shield themselves from such currency wars.

That could enable the region to exert greater flexibility to fine-tune economic growth and guard against the risk of a return to inflationary problems, they say.

A fixed currency regime could affect growth by making it difficult for a government to respond to shocks such as a dramatic collapse in the price of oil, said Ronald MacDonald, professor of economics at the University of Glasgow, who co-edited the book entitled Currency Union and Exchange Rate Issues: Lessons for the Gulf Stateswith Mr al Faris.

“The bigger countries have not played the rules of the game and this can hurt those countries pegged to the dollar,” Mr MacDonald said.

“The danger is if the dollar’s not behaving, this can lead to a [pegged] country ending up with economic policy decisions not in your interests.”

He suggested an alternative to the fixed peg would be pegging the dirham to a basket of international currencies that could, in addition, be linked to the price of oil.

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