Sultan bin Nasser al-Suwaidi, Central Bank Governor, said in Gwacheon, South Korea, today that U.A.E. will end the dirham‘s peg to the U.S. dollar, if it will continue further to depreciate against euro. U.A.E. dirham’s peg to the dollar is almost 30 years old; it started in 1978 and will be probably stopped this or next year.
Dollar’s devaluation causes inflation of imported goods for U.A.E. (they have to import a vast majority of consumed goods). Decreasing the weight of dollar in its currency basket peg (which is currently at 100%), will help Emirates to slowdown such inflation. Al-Suwaidi wasn’t talking about complete abandonment of U.S. dollar, but just adding more major world currencies to the basket. He said:
The plan is not to drop the dollar-peg but maybe to reduce it to a basket which will consist of more dollars, but not totally 100 percent.
This would be not the first time for the Gulf country to stop dollar peg – Kuwait ended its full dollar peg and diversified to a currency basket 6 month ago – in May. United Arab Emirates agreed with its neighbors (Saudi Arabia, Qatar, Bahrain, Oman and Kuwait) not to drop dollar without each other. And they will soon discuss this question on their next meeting in Qatar this December, 3.
For U.S. dollar this can mean a serious pushdown, depending on the volume of reserved dollars to be exchanged to other currencies. U.A.E. and Gulf countries in general have a tremendous currency reserves bloated and increasing on a daily basis thanks to the high oil prices. Such speech by U.A.E. Central Bank Governor can already pull dollar down on Forex, but even bigger problems will await it if these plans become a reality.
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