Thursday, Aug 25, 2016

Abu Dhabi: Ahead of the keenly-eyed speech on Friday by US Federal Reserve chair, Janet Yellen, analysts can only seem to agree on one thing; the US dollar is likely to strengthen in the medium- to long-term.

For the UAE’s government — as well as those of other GCC (Gulf Cooperation Council) countries — this will only add to the already-ongoing argument for them to de-peg their currency away from the dollar.

“Pegging has many dimensions. In terms of predictability, to be pegged to the dollar is a good thing … But we’ve had speculative attacks against currencies here since August 2015. If you look at the forward rate, it shows that speculators expect there to be a shift in terms of the peg. But if you (central banks) did that and started to bend to the market, then you’re on a losing track.

“At this stage, I think there are enough foreign currency reserves in the GCC for the governments that are already pegged to continue to peg because the cost of de-pegging, when all is considered, is probably a lot more than to bend to markets now,” said Sanyalaksna Manibhandu, director of research at the National Bank of Abu Dhabi Securities.

This view was echoed by other industry experts who believe that contrary to what speculators might prefer, the GCC is likely to keep its currency peg to the US dollar.

Nasser Saeedi, former chief economist and head of external relations at the Dubai International Financial Centre (DIFC) and former Minister of Economy and Trade in Lebanon, said in late March 2016 the “pressures are very strong” for currency devaluation especially in Oman, Bahrain, and Saudi Arabia.

“You need to look at your reserves and what you’re using these reserves for. The pressure is there. Is any country likely to move on its own? I think the answer is no. If any country moved on its own, it would be inviting a speculative attack, and it would wipe out all its reserves very quickly … If they’re going to do it, they’re going to do it jointly together,” he said.

As of June this year, the UAE appears to be keeping its policies on the currency unchanged, with the country’s Central Bank governor, Sultan Bin Nasser Al Suwaidi, saying in June that the UAE is not changing its stance on the peg.

“I don’t see the pressure [on the dirham]. Maybe it’s in the forwards [market] and it’s very little,” the governor had told reporters.

By Sarah Diaa Staff Reporter

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