Dollar fall pushes UAE dirham lower against major currencies

A fall in the dollar depressed the UAE dirham against most major currencies in the first half of 2008 to extend a steady decline over the past two years and stoke inflation in the Gulf country.

Official data showed the dirham plunged against the euro, the Japanese yen, the Swiss franc and the Special Drawing Rights (SDR) unit but edged up against the British pound for the first time in nearly two years.

The figures by the Central Bank showed the dirham lost 4.6 per cent of its value against the euro in the first half of 2008, while it tumbled by about 6.3 per cent against the Swiss franc and between two and six per cent against the yen and the IMF currency unit, the SDR.

"Compared to its rate at the end of 2007, the UAE dirham depreciated at the end of the first half of 2008 by 4.6 per cent against the euro, 6.3 per cent against the Swiss franc, around 2.1 per cent against the SDR and 5.3 per cent against the Japanese yen. But it appreciated by nearly 2.0 per cent against the British pound," the Central Bank said.

"On the other hand, the dirham value remained unchanged against the currencies of other GCC member states, except for the Kuwaiti dinar, which appreciated against the dirham by 2.6 per cent at the end of the first half of 2008, compared to its rate at the end of 2007."

The figures showed the dirham began its steady 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 six Gulf Co-operation Council (GCC) countries 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.

Although inflation has hit a double digit in most GCC nations, their governments have resisted strong pressure to quit the dollar on the grounds its decline was only temporary. Their arguments came true in the second half of 2008 when the US dollar started to recover against most other currencies.

"The UAE dirham and other GCC currencies are considered strong currencies given their massive oil resources and foreign assets… the decline in their currencies against other currencies was only a nominal drop because they are tied to the dollar," said George Abed, an adviser at the Washington-based institute of International Finance.

The rapid decline in the US dollar in 2007 pushed the average UAE dirham exchange rate down by nearly eight per cent against the euro and as high as 9.5 per cent against the British pound, according to the Central Bank.

It also contracted by nearly six per cent against the yen and by between three and four per cent against the SDR and the Swiss franc.

Bankers said they expected the nominal value of the UAE dirham and other GCC currencies to recover against the euro and other major currencies by the end of 2008 due to the dollar increase and the decline in many international currencies because of the global financial crisis.

Kuwait is the only GCC member to peg its dinar to a basket of currencies, in which the US dollar is the largest component.

The six members have to decide on a new common peg within their planned currency union, initially scheduled for 2010.

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.

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