The central banks of the UAE and China aim to activate their 35 billion yuan ($5.7 billion; Dh21 billion) currency swap agreement soon, a senior UAE Central Bank official said on Tuesday.
The agreement, designed to facilitate two-way trade and investment, was originally signed in January 2012, permitting the central banks to swap their currencies if needed.
But private bankers believe there has been little if any use of the arrangement in practice. Most of the UAE's trade is conducted in dollars and the vast bulk of its foreign reserves are in dollars; its currency is pegged to the US currency.
Last month, Qatar signed a similar 35 billion yuan swap deal with Beijing and said it would become the Middle East's first hub for clearing transactions in the Chinese currency.
Industrial and Commercial Bank of China's Doha branch was appointed as the clearing bank for yuan deals in Qatar.
Saif Al Shamsi, assistant governor for monetary policy and financial stability at the UAE Central Bank, said on Tuesday that his institution and the Chinese central bank were now eager to "activate" their swap arrangement.
"Right now we are in the process of activation of the swap. It has not been activated yet. There is an official communication," he told reporters, adding that the process could be completed in coming months.
Shamsi said a yuan clearing centre might also be set up in the UAE, though he did not elaborate.
He said he would not comment on the idea of making the yuan part of the UAE's foreign reserves, but asked whether the central bank was diversifying into other currencies, he said: "No, it's 99 percent dollar."
The UAE Central Bank's foreign currency assets totalled Dh327.6 billion ($89.3 billion) in July.
UAE forex peg here to stay
Shamsi said the UAE will keep its currency peg to the US dollar.
Asked by Reuters whether the dollar's global strength was putting any pressure on the peg, Saif Al Shamsi said the dirham had effectively been pegged since the 1980s.
"We have been maintaining this peg and this exchange rate since 1980 until today, and in the future we will continue with this." He cited a Central Bank statement at the end of last month which reaffirmed the UAE's commitment to the peg.
Over the last two weeks the dirham, fixed at 3.6725 to $1, has edged down to its lowest level against the dollar in over a year in the one-year forwards market, implying marginal depreciation against the peg over the next year.
Local bankers believe some investors are reacting to the plunge of global oil prices to five-year lows, as well as a similar move in Saudi riyal forwards, which are often used as a proxy for risk in the region.
However, they do not think the UAE or Saudi currency pegs face any serious pressure, since the big Gulf economies have built up huge fiscal reserves which they could use to keep spending high for years, even if oil stays near $70 a barrel.
Citing a forecast by the International Monetary Fund, Shamsi said on Tuesday that he expected the UAE's gross domestic product to grow 4.25 per cent in 2014, with the non-oil sector expanding 5.5 per cent in both 2014 and 2015.
"The UAE economy is diversified - more than 60 per cent is non-oil," he said.
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