Delinking the dirham from the dollar is currently ruled out

[glover]

From the Arabic Daily al-Bayan, in today's edition. This is my translation.

Depegging the dirham from the dollar is currently ruled out

Sources in the Central Bank ruled out that the dirham will be depegged from the dollar at the current stage in the wake of the Kuwaiti depegging decision. The sources expected that the dirham exchange rate against the dollar will remain stable for a long period, due to the fact that between 65 and 70% of the imports of the country, and more than 70% of its exports, are set in dollars. They also pointed out that UAE exports are rapidly increasing.

Further, income from the tourism sector is expanding rapidly as a result of the stability of the dirham, and only 20% of the UAE's exports and imports come from the European Union. Also, most of the UAE investments are set in dollars, and therefore any unstudied change in this area may not be in the interest of the national economy.

[AltinD]

Since I'm European ....

[glover]

it should actually be good. it means that your currency will stay strong relative to the dirham!

[AltinD]

No the opposite. It means my savings in Dirhams amounts LESS then they should, it also means that any visit back home it will cost me much more then it should.

[D Ecksby]

They'd be attracting more European tourists anyway.

[glover]

Originally Posted by AltinD

No the opposite. It means my savings in Dirhams amounts LESS then they should, it also means that any visit back home it will cost me much more then it should.

oh i see! your income is generated from the UAE. But the government here wants to keep it this way partially becuase europeans see real estate and tourism in the UAE as a great deal due to the weakness of the dirham.

[rexdmx]

the weakness of the dirham should help exports then..
but then there would be an outflow of funds if the dirham is weak as people should put money into places where their currencies is high.. but then again people would also think of investment potential in uae which is high at the moment
thinking about inflation(where the hell is sameerl when u need him!!), if the currency is pegged to the dollar, shouldn't the rates be going hand in hand with U.S. rates..?

Originally Posted by glover

oh i see! your income is generated from the UAE. But the government here wants to keep it this way partially becuase europeans see real estate and tourism in the UAE as a great deal due to the weakness of the dirham.

[sameerl]

rexdmx:

The UAE interest rates have been tracking US Dollar interest rates since inception as you rightly figured out, due to the currency peg. Now, an appreciation of the currency will hurt exports (so the traditional theory goes) as the exports are based in US Dollars. However, the following are the points that the central banks are grappling with:

1) High domestic inflation due to a combination of rental rate increases as well as imported inflation (day to day commodities and their raw materials are mostly imported, and costs are increasing with the depreciating dollar

2) Interest rates cannot rise or fall as the currency is pegged. This together with an expansionery fiscal policy (large amounts of monies being spent on infratsructure, and related projects which is extremely stimulative for the economy) means that the government does not have tools at its disposal to combat inflation the way other countries in the west do

3) Dollar depreciation is likely to continue. The US government is continuing to exert pressure on China to revlaue. This is being done, which implies further dollar weakness and therefore further inflation for the UAE and the region

4) What Kuwait has done (wisely in my opinion) is to link their currency to a basket thereby allowing the central bank to raise interest rates. This prevents the region from being "priced out". I dont think that there is any other option but for UAE, Qatar, Bahrain and others to follow (probably in that order)

Exchange houses and banks in the UAE are refusing large dollar exposures effective today as they are pricing in a probability of a revaluation. So unless the US government hikes interest rates dramtically in the short term (unlikely; their next move is likely lower), we should all be lookiing forward to a near term appreciation of the UAE Dirham

[glover]

the way it looks now is that the government believes most of the inflationary pressure in the UAE is due to the dramatic increase in rents, and once that's under control, inflationary pressures will ease. that's why they issued these rent caps recently, and even tightened it further in the case of Dubai. my reading of this is that the government believes the increasing supply of apartments will also contribute to lowering inflation, which they see happening by next year at the most.

But even if they go the Kuwaiti route, to maintain stability, the basket will be heavily weighed to the dollar, and thus the appreciation will be pretty small if not negligible.

by the way, the depegging had a negligible effect on the value of the Kuwaiti dinar so far

[sameerl]

glover:

1) The depegging has had a negligible impact thus far because they havent announced the trade weighted basket as yet. I think you'll see a gradual creep up in the next few weeks

2) I agree that it has to be heavily weighted towards the USD. I think a 3-5% move is coming, mainly to loosen up the reins on interest rates. If you look at China, they have appreciated the yuan by 8% in a year and a half. This is hardly dramatic. But this allows them to gradually increase interest rates (which theyve done) and restrict inflation (somewhat successful)

3) If you look at the privet sector weights on the consumer price index (the standard chartererd, hsbc, and/or the abn amro versions), there is a large weight on rents, but if you strip it out, core consumer inflation is still pretty high (7-11% depending on which version you look at). This is largely due to imported inflation, and its upcreep will only worsen with the declining dollar.
This is why a move is necessary, in my opinion

[glover]

That' not how the Governor of the UAE Central Bank sees it!

Gulf News
Published: 16/05/2007 12:00 AM (UAE)

Sultan Nasser Al Suwaidi, Governor of the UAE Central Bank said abnormally high rents and overall supply constraints are fuelling the inflation rate

Housing supply rise to dampen inflation

By Babu Das Augustine, Banking Editor

Dubai: The rate of inflation in the UAE is in "high single digits" and will come down substantially this year as more housing units are released onto the market, Sultan Nasser Al Suwaidi, Governor of the UAE Central Bank, said.

Reacting to recent comments by International Monetary Fund officials, Al Suwaidi said, "There wasn't an alarming growth in the UAE's inflation last year. It is true that we have high single digit inflation and we expect it to come down substantially this year as new supplies cool the property demand." Inflation is below 10 per cent, he added.

This week Mohsin S. Khan, Director of the IMF's Middle East and Central Asia Department, told Gulf News that the UAE's inflation is estimated at above 10 per cent, but Dubai's rate is much higher.

Al Suwaidi agreed with the IMF's observation that a shortage of housing units, abnormally high rents and overall supply constraints are fuelling the inflation rate rather than the higher cost of imports caused by the fall of the dollar.

A declining dollar, to which the dirham is pegged, has resulted in a relative fall in the purchasing power of the dirham against many international currencies, adding to inflationary pressures.

The governor maintained that the role of imported inflation in the UAE is marginal.

[rexdmx]

glover,
here is something which gives a tickle.
most of the property sales in dubai are not with ready properties but with offplan since many are looking for capital appreciation and not rental rates to cover mortgages.
most of the properties are not geared towards the middle income man but the luxury end of the market.
how can increasing supply cool down inflation?who would rent it???

another issue; did kuwait unpeg their currency for short term or long term gain? the reason is, what would happen to the single currency notion??

answers are needed before i pass out

Originally Posted by glover

That' not how the Governor of the UAE Central Bank sees it!

Gulf News
Published: 16/05/2007 12:00 AM (UAE)

Sultan Nasser Al Suwaidi, Governor of the UAE Central Bank said abnormally high rents and overall supply constraints are fuelling the inflation rate

Housing supply rise to dampen inflation

By Babu Das Augustine, Banking Editor

Dubai: The rate of inflation in the UAE is in "high single digits" and will come down substantially this year as more housing units are released onto the market, Sultan Nasser Al Suwaidi, Governor of the UAE Central Bank, said.

Reacting to recent comments by International Monetary Fund officials, Al Suwaidi said, "There wasn't an alarming growth in the UAE's inflation last year. It is true that we have high single digit inflation and we expect it to come down substantially this year as new supplies cool the property demand." Inflation is below 10 per cent, he added.

This week Mohsin S. Khan, Director of the IMF's Middle East and Central Asia Department, told Gulf News that the UAE's inflation is estimated at above 10 per cent, but Dubai's rate is much higher.

Al Suwaidi agreed with the IMF's observation that a shortage of housing units, abnormally high rents and overall supply constraints are fuelling the inflation rate rather than the higher cost of imports caused by the fall of the dollar.

A declining dollar, to which the dirham is pegged, has resulted in a relative fall in the purchasing power of the dirham against many international currencies, adding to inflationary pressures.

The governor maintained that the role of imported inflation in the UAE is marginal.

[IISinbadII]

But Shaikh Mohammad Bin Rashid Al Maktoum said today: "“The UAE government is not thinking of delinking the dirham from the dollar,” .

http://www.gulfnews.com/business/Economy/10127036.html

Doesnt that mean that we should forget any delinking?

[Hollie Maea]

Originally Posted by AltinD

Since I'm European ....

Is Albania using the Euro yet, or do they still have their own currency?

[AltinD]

Of course we have our own (not member of the so-called Euro Zone) but our foreign reserves are mostly in EURO becouse our main trading partners are from Europe, so the "ALL" is on its highest point against "USD" that it has been in more then 10 years.

[Hollie Maea]

That's what I thought. Last time I was there it was that way but I wasn't sure if it had changed since then.

[sameerl]

Glover:

Two issues:

1) If you look at the central bank weights on the consumer price inflation index (published half yearly) they give rents a 15% weight. In other words, according to them, the evrage household spends 15% of their annual income on rent. This is absurd. At the very least, its 30-40%, which is why the central bank underestimates inflation

2) HH announced that the peg would not be abandoned, thereby reducing the speculation that was building up. Notice he didnt rule out a revaluation to the usd. I think he ruled out a peg to a basket of currencies, but this does not rule out a revaluation.

In any event, i think the next few months should be interesting as other central banks in the region also make their move

[glover]

Thanks for the insightful comments. i'm not arguing that there is no need for one, i'm simply stating that the leadership of this country thinks otherwise! even with high inflation, in the end they believe they are better of with a weak dirham.

from what i gather so far, other Gulf states, including the UAE, are not happy with the Kuwaiti move. first, it was done without coordination with the other Gulf states, contrary to their agreement in 2002. second, it will jeopardize the single currency becoming a reality in 2010!

[rexdmx]

news today from gulf news

Published: 23/05/2007 12:00 AM (UAE)

UAE acts to curb speculation
By Babu Das Augustine, Banking Editor



Dubai: The official policy of the UAE government that the country is committed to maintaining the dirham's peg to the dollar is expected to stabilise the currency's value.

His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, told reporters in Seoul yesterday that the government had not discussed a change (in the peg).

The official stand comes amid strong market speculation about the future of the peg following Kuwait's decision to delink its currency from the dollar.

UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi said yesterday the country was committed to maintaining the dirham-dollar peg.

Commitment

"We are committed to a decision by Gulf leaders to keep currencies pegged to the dollar at a fixed rate," he told reporters in Kuwait yesterday.


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Following Kuwait's decision to peg the dinar to a basket of currencies on Sunday, there has been mounting speculation that the UAE will revalue its currency.

Anticipating an appreciation of the dirham against the dollar, some banks in the country had advised their branches on Monday not to commit to any forward quotes on large dollar transactions.

Quick reaction

The statements had an immediate impact on currency markets. The dirham fell 0.03 per cent to 3.6729 to the dollar, the sharpest fall in three months, before recovering to 3.6725 to the dollar at noon.

"Although we see the dirham as the most likely candidate for a revaluation after the Kuwaiti dinar, strong statements from the government and the central bank have now reduced the probability of a revaluation from about 30 per cent to below 10 per cent," said Steve Brice, an economist with Standard Chartered Bank.

After Kuwait's move, analysts expect the Gulf states to peg their currencies or the single currency against a basket of currencies.

"The trend favours a trade weighted basket of currencies against any one currency," said Nasser Saidi, chief economist at the Dubai International Financial Centre.

[rexdmx]

UAE's dollar peg to stay
By Abdul Hamid Ahmad, Editor-in-Chief



Seoul: The UAE is keeping its currency’s peg to the dollar and will rethink its commitment to the GCC monetary union if it would affect the country’s economy.

“The UAE government is not thinking of delinking the dirham from the dollar,” His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice President and Prime Minister of UAE and Ruler of Dubai, told media officials in Seoul on Tuesday, the second day of his state visit to South Korea.

He met earlier with South Korean President Roh Moo-hyun, where they discussed means to expand bilateral ties.

On Sunday, Kuwait abandoned its currency's peg to the dollar in favour of an undisclosed basket of currencies resulting in sudden appreciation of the dinar. The Kuwaiti decision is seen as the strongest hurdle yet in the way of the creation of the Gulf monetary union by 2010.


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Shaikh Mohammad told the media the monetary union is “currently under study” in the UAE. “The UAE will have reservations on the union if it were to affect our economy. Concerned officials will have to look into that,” he explained.

The South Korea visit, he noted, is aimed to expand relations with Asian countries, including also China and Japan, to create a balance in UAE foreign relations.

“We want to create this balance between East and West. As you see, I am today visiting South Korea while Shaikh Mohammad Bin Zayed Al Nahyan (Deputy Commander-in- Chief of the Armed Forces and Crown Prince of Abu Dhabi) visits the US.”

The UAE is the second-largest supplier of oil to South Korea, which imports almost all of its oil. The two countries' trade volume stood at $15.8 billion in 2006, and some 90 South Korean firms are operating in the UAE.