Ikaraam Ullah June 2010
• The Euro has lost some 15% of its value since
the beginning of the year. Sterling also fell by
as much, but for different reasons.
• Or the US Dollar has strengthened on the
back of a weak global economy.
• And some currencies have stayed strong
(Malaysia, India, Thailand)
Currency Movement Against the US$
110 110 Dirham
60 60 Weak
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Jan Feb Mar Apr May
Source: US Federal Reserve, *Annual averages 2000-2009, Monthly averages Jan-May
The ‘Strong’ Dirham
• Euro appears weak relative to 2008 but not
over the decade.
• If the next US rate movement is up - dollar
gets stronger – better Euro rate to come?
• Examining nominal exchange rate strength
masks underlying trends. Looking at UAE’s
trade partners reveals something else..
The ‘Weak’ Dirham
• Index is approximate, representing 70% of
(non-Oil) Imports, Exports and Re-Exports.
• Nominal Effective Exchange rate for Exports
and Re-exports is higher than Imports.
• UAE spends more Dirhams (barrels of oil) on
Imports than it gains from Exports despite the
currency peg to the US$.
• UAE Imports are more than double
Benefits of Pegging
• Is there a trade benefit? Over past
decade, 30% UAE’s imports priced in Euros
and 30% exports priced in Indian Rupees.
Benefit of peg accounts to less 15% of imports
and 20-25% of exports.
• Argentina pegged its currency to avoid a
repeat of hyperinflation – the UAE has no
such recent experience. If importing inflation is
a risk to everyone, why worry?
Risks of Pegging
• Relatively high inflation in UAE (~12%
compared with 5% in the US) means loss of
competitiveness, no correction mechanism.
• Higher inflation means on a government level
the UAE forgoes more barrels of oil in
expenditure for the same output.
• Oil prices have risen faster than inflation. If oil
price growth slows or goes into reverse =
problems for public finances.
Floating Exchange Rate ?
• Should the UAE have to infer credibility by
maintaining a peg?
• Should a currency reserve be needed if
several large wealth funds fulfill the function
• Staying out of the GCC monetary union
means UAE is ‘out’ of joining the GCC
monetary union but still ‘in’ the union of fixed
exchange rates. Is a union needed?