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Mon 25 Feb 2008 01:20 PM

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UAE being held back by dollar peg

Dirham's peg to dollar no longer viable as US economy spirals into recession, economist warns.

The UAE's booming economy is being held back by its currency peg to the weak US dollar, the Asia editor of The Economist magazine told ArabianBusiness.com on Monday.

Speaking on the sidelines of a conference in Abu Dhabi, Pam Woodall said it was no longer economically viable for the UAE and other Gulf states to continue with their dollar peg as the US economy was spiralling into recession.

“All countries pegged to the dollar are suffering rising inflation. Abu Dhabi is growing at an amazing rate, it does not make economic sense for booming economies to peg their currencies to a country that is about to go into recession,” Woodall said.

Woodall predicted the issue of the dollar peg would continue to dog Gulf states over the next year as further rate cuts by the US Federal Reserve fuelled inflationary pressure.

The Fed has cut interest rates by 225 basis points to 3% since September 18 to help ward off recession.

Gulf states have been forced to mirror to deter bets on an appreciation of their dollar-pegged currencies at a time when their economies are booming and inflation is at record levels.

Inflation in Saudi Arabia, the Gulf's largest economy, hit a 27-year peak of 7% in January, while in the UAE inflation hit a 19-year high of 9.3% - the latest available figure.

Soaring inflation and the need for a more flexible monetary policy has heaped pressure on central banks to revalue or depeg their currencies.

Woodall said that if the UAE was independent of the GCC and its politics, the country would have de-pegged already.

“The governor of the central bank said last year that the bank needed to reconsider the peg, but because you have to consider the Gulf region as whole, including Saudi Arabia, the Gulf economies have to move together,” she said.

Woodall said the US recession and resulting weakening of its currency would see the end of the dollar as the world’s main reserve currency.

Countries hold large amounts of dollars in reserve in part to maintain the stability of their own currencies.

“Already we are seeing evidence where central banks are putting a smaller percentage of their reserves into dollars,” she said.

Woodall said the impact of a US recession on the global economy would be reduced by the strength of global emerging markets such as China and India.

Rapid growth in these two countries will give the global economy a massive boost, with China set to become the world’s largest economy within twenty years, she said.

However, she warned the shift in world power due to the growth in Asian economies would inevitably cause new world tensions.

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