Dollar boosts dirham and eases inflation

Stronger US dollar boosted the UAE dirham against other major currencies in the first quarter of 2009 and helped ease inflation after climbing to a record annual level in 2008, according to official figures.

While the dirham remained unchanged at 3.6725 to the dollar given the long-standing peg between the two currencies, it strengthened against the British pound, the euro, the Swiss franc and partly the Japanese yen.

The figures, published by the Central Bank this week, showed the dirham increased sharply against the pound in the first quarter to reach 5.2098 at the end of the period compared with an average 6.7948 in 2008.

The surge in the dollar also pushed down the euro to about Dh4.7662 in March from an annual average of 5.2391 in 2008, while the Swiss franc dipped to 3.1681 dirhams from 3.2949 in the same period. The yen gained ground against the dirham in January before falling to about 0.0375 in March. The Special Drawing Rights, a unit used by International Monetary Fund, also shrank to about Dh5.4336 in March from nearly Dh5.718 in 2008.

"On the other hand, the dirham value remained almost unchanged against the currencies of other GCC member states, except for the Kuwaiti dinar, which is pegged to a basket of currencies," said the Central Bank.

The figures showed the dirham had started to decline against most major global currencies towards the end of 2006 because of the weakening US dollar, to which the dirham and other GCC currencies are pegged.

The drop in the US currency has been cited as one of the main factors for soaring inflation rates in the GCC?as it dragged down their currencies and made their imports from non-US markets costlier. Other factors included a surge in rents and food prices, and strong domestic demand due to the economic boom in the region.

Inflation climbed to double digit rates in most Gulf countries in 2008 but they sharply receded in the first half of 2009 and are projected to dip further by the year-end because of the strengthening US dollar, a decline in global commodity prices, and waning domestic demand in the region mainly due to the global distress and faltering crude prices.

Mounting speculation about a possible GCC decision to appreciate their currencies against the US dollar in 2007 and early 2008 has triggered a massive influx of hot money but officials have said most of it was siphoned out of the region after speculation about a revaluation died down.

After soaring to a record annual rate of 12.3 per cent in 2008, inflation in the UAE dived to only 4.9 per cent in the first fourth months of 2009 and is projected to plunge to its lowest level in almost 15 years.

In a study last week, the Saudi American Bank Group (Samba) forecast inflation in the UAE at about one per cent this year but expected it to rebound to about 3.5 per cent in 2010 on recovering domestic demand.

Trade figures by the Central Bank showed a weak US dollar in 2008 sharply boosted the value of the UAE's imports from non-US markets, with those from the European Union jumping to around Dh37.7 billion in the third quarter of last year from nearly Dh29.3bn in the second quarter.

Imports from Britain, one of the UAE's largest economic partners, leaped to about Dh10.05bn from Dh4.82bn in the same period.

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