‘Forex peg here to stay’

10/12/2014 05:55 AST

The UAE will keep its currency peg to the US dollar, a senior central bank official reiterated yesterday after an unusually large move by the dirham in the forwards market.

Asked by Reuters whether the dollar’s global strength was putting any pressure on the peg, Saif al-Shamsi, assistant governor for monetary policy and financial stability, 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 or risk of coming under attack, 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, al-Shamsi said he expected the UAE’s gross domestic product to grow 4.25% in 2014, with the non-oil sector expanding 5.5% in both 2014 and 2015.

“The UAE economy is diversified - more than 60% is non-oil,” he said.

Gulf Times