UAE PEG THE AED TO THE EURO

UAE PEG THE AED TO THE EURO

The US and eurozone debt crises have ushered a new era of the improbable in currency and financial markets. This may be a good time to re-assess the UAE's policy of "pegging" the dirham in a constant relationship of Dh3.67 per US dollar.

Gulf economies have anchored their domestic currencies to the US dollar. But new uncertainties surrounding the dollar lead many to ask if the UAE should either a) repeg the dirham to a basket of world currencies or b) float the dirham and pursue other monetary objectives.

Repegging would likely involve a range of currencies including the euro and the pound sterling. This might allow the dirham to remain strong against other currencies, but that may not be a desirable policy objective. After all, a weak dirham increases foreign demand for both tourism and real estate - two important pillars of the UAE economy. in addition, moving to a basket of currencies would introduce uncertainty in budgeting since oil, which is traded in dollars, remains an important part of central and sub-central government revenues. And including sterling in the currency basket would likely achieve a strong dirham but the euro, just like the dollar, is currently beset by uncertainty with the added risk of a eurozone break-up.