Dirham needs 35pc surge against dollar: experts

Dirham needs 35pc surge against dollar: experts
By Isaac John (Deputy Business Editor)KHALEEJ TIMES 6 October 2007

DUBAI — Predicting a 30 per cent possibility for an imminent revaluation of the UAE dirham, monetary experts said the UAE currency needed a significant appreciation of 35 per cent against dollar to regain its intrinsic strength in relation to other currencies.

Gary Dugan, Chief Investment Officer, Global Wealth Management, Merrill Lynch, told Khaleej Times that the GCC currencies needed to appreciate by around 35 per cent to reduce excessive savings. “In the shorter term, we expect the UAE or Qatar will move to peg versus a basket of currencies this year.”

According to Pradeep Unni from Vision Commodities Services, the UAE currency has lost 55.09 per cent against euro since 2001 — from Dh3.34, the euro is now selling at Dh5.18. Against, the British pound, dirham has lost 38 per cent in the same period, with the exchange rate surging from Dh5.41 in 2001 to Dh7.48, while against the Indian rupee, dirham has lost 24 per cent since May 2002 — dropping from Rs13.32 to Rs10.73 per dirham at present.

Despite UAE Central Bank’s insistence that it would neither opt for a revaluation of dirham nor move away from the US dollar peg, currency experts and economists believe that the likelihood of an imminent revaluation of the UAE dirham is 30 per cent.

Currency strategists said a revaluation of the dirham, which is currently estimated to 30 to 35 per cent undervalued against the US currency, could also provide investors a nice bonus on a property purchased in the UAE compared to parking that investment in a US dollar deposit account.

While affirming that an upward adjustment of dirham to the US dollar will be increasingly likely unless inflation begins to slow more noticeably next year, economists are of the view that there is increasing pressure on the UAE monetary authorities to drop dollar peg and switch to a basket of currencies as Kuwait and Syria have done. “Such a move will ward off any further inflationary trends by strengthening the dirham against other currencies,” they contend.

However, experts warn that the UAE has to undertake a series of currency realignments to ensure the true value of its currency. “While most of the UAE’s exports (oil and gas) are priced in dollars, the country’s biggest share of imports comes from non-dollar zone. A steadily falling US dollar is thus aggravating inflation which last year hovered above 10 per cent due to higher cost of imported goods, a steep surge in rents and other living expenses.”

Dugan said the dollar looked set for further weakness. “We believe that dollar weakness comes from both cyclical and structural factors. Cyclically the US economy is set to be one of the weakest in 2008. Structurally the US economy is still facing the twin deficits of a current account and fiscal deficit. Also the weakness of the dollar has gained some momentum that may extend through the fourth quarter of 2007.”