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UAE revaluation confusion reigns

Middle East: Monday, December 03 - 2007 @ 19:46

Tourists at the Dubai hotels and residents going to their local exchange house to send money home over the holiday weekend were surprised to find that exchange rates had changed.

Indeed, rates as low as Dhs3.07 to the US dollar was being quoted. At the same time, anybody with an ATM card could access a US dollar bank account in the UAE and obtain dirhams at the ‘fixed peg’ exchange rate of Dhs3.69 to the US dollar.

For a couple of days it was possible to withdraw such funds at the ‘fixed peg’ rate and go to a local exchange house and make an instant profit of 15 per cent or so on the difference.

Arbitrage opportunity

Probably very few people took advantage of this small window of arbitrage opportunity in the local foreign exchange markers. But it was clearly embarrassing enough to the central bank that the window was slammed shut almost as quickly as it had opened.

All eyes are now on the GCC summit in Doha, taking place today and tomorrow, for an official statement on the outlook for the currency regime.

Official forward markets for the UAE dirham suggest a rate of Dhs3.54 within a year. But it is hard to second-guess the outcome of a meeting of GCC leaders. Qatari Finance Minister Yousef Kamal told journalists that the US dollar was ‘not on the agenda’.

That only fuelled speculation that Gulf central banks will just go their separate ways over the issue. The UAE and Qatar have indicated that they would like to see their currency valued by reference to a basket of currencies like Kuwait.

Peg devotees

On the other hand, Saudi Arabia, Oman and Bahrain are known to want to stick to the US dollar-peg, albeit with a revaluation on the cards.

The UAE exchange houses appear to have acted alone and illegally over the weekend as protection from the devaluing dollar. And anyone who had to change US dollars over the weekend has been a loser.

If nothing else this false alarm over revaluation has demonstrated the reality of the event. At hotels new rates for all the major currencies were evident, a reminder that the dollar-peg rate impacts on all cross rates.

The complaints from tourists are an indication of the likely impact on this industry, which has become a key revenue source for Dubai in particular.

At the same time, the UAE central bank has lowered local interest rates to try to dissuade speculators from holding dirhams. Unfortunately that is also an inflationary step and adds further fuel to the runaway real estate boom.

Setting exchange rate policy in this environment is not an easy job, but letting markets do it like last weekend is no good either.

See all:
How revaluation would benefit UAE investors
A new Middle East currency regime looks inevitable

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Monday, December 3- 2007 @ 19:46 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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