Time not yet right for UAE to depeg from the dollar

Will they, won’t they? Any day now we will know whether the US Federal Reserve will raise interest rates and signal the end of the policy of cheap money that has effectively dominated the global economy since the financial crisis of 2009.

Thursday’s Fed meeting will decide whether or not to increase rates this month. The experts are split down the middle, with few able to read the signs coming from the Fed’s chairwoman Janet Yellen. The consensus is that she probably wants to, but has been having some second thoughts because of the worrying noises emanating from emerging market economies, especially China.

She would not want to exacerbate an already delicate situation for the Chinese economy and financial system.

A Goldman Sachs expert noted this week that the uncertainty in global economies – wobbling economic growth, volatile currencies, patchy economic prospects in the US and European chaos – was the equivalent already of three rate rises in the system.

Goldman is advising caution, forecasting a December increase, but even suggesting that it might be wise to hold off until next year. The first US rate rise in nearly a decade is obviously something that should not be a rushed decision.

Most equity market people are similarly cautious, wanting the party to carry on for just a while longer, but the bond markets seem to be more resigned to a rise. We will know soon enough.

In the Gulf region, the uncertainty has had its effect on local equity markets, but some experts have noted that the concern is less what a rise would mean for regional markets per se, than for the knock-on economic effect from emerging market volatility.

Because of the peg that most local currencies have to the dollar, the repercussions will probably be limited to the oil market. Because crude is priced in dollars, a rise in the value of US dollars that would follow a rate rise would make oil assets comparatively cheaper, in a world already awash with them.

On the other hand, a rise in the dollar price of oil would be welcomed in most Gulf finance ministries. The net effect will probably be neutral at worst.

It must be galling for local policymakers once again to be waiting on events in Washington to decide regional economic issues, and the speculation over interest rates has again led to speculation that GCC states, including the UAE, should look to depeg from the dollar.

In an ideal world, it would be desirable to have complete control of your currency, but in the modern interconnected global world, dominated by huge currencies like the dollar, the yuan and the euro, that is nearly impossible.

Some oil-dependent countries have tried to reduce the dollar influence recently, with mixed results. Azerbaijan devalued by a dramatic 30 per cent against the dollar earlier this year, to little apparent benefit so far. More recently Kazakhstan allowed its currency to float freely, with a resulting 25 per cent drop.

Might Saudi Arabia and the UAE be considering similar drastic action? The odds, according to recent research from Deutsche Bank, are firmly against any serious revision to the dollar peg or devaluation.

Both countries are experiencing fiscal drains because of the low oil price, but have sufficient assets to enable them to sit tight and wait for an oil price uplift. There are some signs the Saudi-led policy of maintaining high levels of supply at low prices is having the desired effect, forcing expensive US producers to cut back supply.

For the Gulf economies, now would seem to be the least appropriate time to think again about the dollar peg, given currency, emerging market and energy price turmoil. Much better to stay with the global market currency leader, the dollar.

The time for a peg break may eventually come, but it will not be for many years. Whatever happens in Washington should not affect the region’s long-term strategic planning.


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