UAE Central Bank firmly committed to US dollar peg, says governor

United States dollars with UAE dirhams in the background. The UAE has no plans to depeg its currency. Ryan Carter / The National

The UAE has no plans to abandon the currency’s peg to the dollar, the Central Bank governor Mubarak Al Mansouri said.

“The dirham peg to the US dollar has served the UAE well over time,” Mr Al Mansouri told Bloomberg. The Central Bank “maintains a firm commitment to the peg”.

Investors have increased bets that the GCC countries may be next to abandon their pegs after China devalued the yuan and Kazakhstan allowed its currency to float.

Saudi Arabia, the world’s biggest oil exporter, has already said it had no plans to decouple from the US currency.

Dollar forward contracts for the Saudi riyal rose in August after investors speculated that the low oil price could force the kingdom to abandon its peg to the US currency.

The Saudi Arabian Monetary Agency (Sama), the kingdom’s central bank, has been burning through its reserves to fund its US$120 billion 2015 fiscal deficit, equivalent to 19.5 per cent of GDP.

But economists said that it was very unlikely that the Saudi government would abandon the dollar peg by choice.

“In past pressure points – in 2008 and 2009, for instance, when there was some pressure on regional pegs [after Sama did not follow the Federal Reserve in cutting rates] – the situation was more acute than they are today, but the pegs remained,” said Tim Fox, chief economist at Emirates NBD.

“Over many years, the peg has been good for economic policy – it has been a reliable way of managing the exchange rate and it has given confidence,” Mr Fox said.

The Saudi riyal was first pegged to the dollar in 1986.

Bets for a devaluation of the UAE’s dirham also surged in the past month to the highest in more than six years on September 10.

One-year forward contracts for the currency, an indication of where the dirham is expected to trade in the period, dropped 24 points since then to 91.45 points.

Meanwhile, the UAE Central Bank’s foreign assets fell 7.6 per cent from a year earlier to Dh264.2 billion in August, official data showed yesterday.

“It’s probably in every [Gulf state’s] interest for no Gulf country to leave its peg to the dollar,” Mr Fox said. “If one country were to abandon its peg, that would clearly raise questions about other countries. These things do have that kind of sequential effect.”

* with additional reporting by Adam Bouyamourn

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