Pegged off

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There are few expatriates in the UAE who have not been hit hard by the declining value of the dollar and its impact on the value of the dirham.

Those who arrived two years ago or more have seen the value of their salaries in their home countries slide and their domestic purchasing power rapidly decline.

Expatriates only have to head home to Europe or to India and compare the exchange rate they get there compared to one or two years ago - to see the impact the situation is having on them.

But with Kuwait having recently unpegged its currency, the Kuwaiti dinar, from the dollar, speculation is rife that the UAE is set to do the same - sending the value of the dirham soaring once again.

In this feature we look at the impact the dollar peg is having on expatriates' finances and whether the situation is likely to change.

What is the dollar peg?change rate, also

A pegged exchange rate, also known as a fixed exchange change rate is where a currency's value is matched to that of another foreign currency.

As the value of that foreign currency rises and falls so too does the currency of the country, which has pegged itself to it.

So in the case of the dirham, its value against other world currencies is directly linked to that of the dollar.

The dirham was pegged to the dollar during the 1980s during the Iran-Iraq war in an attempt to bring financial stability to the region, as Steve Brice, Standard Chartered Bank's head of research, explains: "The UAE together with other central banks in the region, pegged their currencies to the dollar in the 1980s. This was partly due to the desire for financial market stability during the Iran-Iraq war.

"They've stuck to the peg of AED3.67 to the dollar ever since," he goes on to say.

However this decision has had a negative impact on the UAE economy in recent years due to the falling fortunes of the dollar.

An economic slowdown in the US accompanied by falling interest rates has seen the dollar plummet in value against 10 of the world's most actively traded currencies, reaching an all time low against the pound and the euro in June of this year.

As whatever happens to the dollar has a direct impact on the dirham, the situation has also led to a major drop in the value of the dirham against the world's major currencies and, some experts say this is to blame for rising inflation in the country.

"This policy has had several implications on the UAE's economy," says Brice

"We obviously have very high inflation levels in the UAE. This year that figure is 9.3% - that's our calculation rather than the official figure.

"The dollar peg means there are no domestic tools to counter this inflation - interest rates are determined by US monetary policy.

"So you've got a situation where the dollar is very weak, which exacerbates the UAE's imported inflation levels.

"Looking forward, there's the prospect of US interest rates coming down, which will also stimulate the UAE's economy and push up inflation.

"Add in high oil prices and you've got what we believe to be a perfect storm for the currency peg."

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