Why UAE residents should hold on to their dirhams

Indian rupee, on the other hand, could face resistance at Rs62.84 against the US dollar (Rs17.10 against Dh1) in the coming few days. (File)

The US dollar has been on the rise for many quarters, peaking in the Middle of March 2015, but this consistent rise in dollar may not have been realised directly by the UAE residents.

In line with the rise and fall of the dollar, savings of the UAE residents expand and contract due to the pegging of the UAE dirham to the dollar.

And going by the advisory of an international bank specialised in currencies and commodities, the US dollar is expected to rise further, meaning the UAE residents should hold their savings in Emirati dirham – or the dollar.

The Denmark-headquartered Saxo Bank predicted in its newly-released Essential Trades Q2 2015 report that the greenback will continue to rise in the near term.

“Broadly speaking, the US dollar rally looks set to continue in the second quarter, though the action may prove less brutal than we had become accustomed to in the breath-taking revaluation of the greenback between November and January, particularly in EUR-USD,” said John J. Hardy, Head of Forex Strategy at Saxo Bank.

The US dollar had risen rapidly over the past six months. Indeed, the greenback’s appreciation since last July was the second fastest in the past 20 years, only after the post-Lehman period, Bank of America-Merrill Lynch said in its February note.

The greenback had, however, over the last few sessions lost some ground on the basis of US Federal Reserve signalling a more cautious outlook for US economic growth. The dollar lost out against most of currencies last week except for the Australian dollar.

Tim Fox, Chief Economist at Dubai-based Emirates NBD bank, sees further correction in the wake of the jobs report, possibly to as high as EUR1.15. The market will look for guidance about Fed policy from the March FOMC policy minutes.

The American bank expects greenback to strengthen in tandem with US rates hike.

Bank of America-Merrill Lynch had predicted a high of 65 and low of 60 for the Indian rupee to the dollar in its Rs60-65 range forecast. The rupee is currently trading 62.17 to the dollar.

Despite indications from the US Federal Reserve that they could start hiking rates as early as June, the Fed is likely to wait until the second half of 2015 before raising interest rates, analysts said.

Apart from the dollar/dirham pegging factor, the Emirati currency has also been rated one of the best options when it comes to exchange rate stability.

Switzerland-based IMD’s World Competitiveness Centre said recently that the UAE dirham is among the world’s top 25 currencies for exchange rate stability, thanks to its policy to peg currency to the dollar.

Rated 24th for exchange rate stability, the UAE dirham is more stable than the currencies of Hong Kong, Singapore, South Korea, France, Germany, Italy and Japan, among others.

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