Tuesday, July 26, 2005

Dirham caught in the peg :: Khaleej Times


China's decision to revalue yuan is expected to help the US reduce its trade and fiscal deficits, but it will have serious consequences for countries including the UAE, which have currencies directly pegged to the dollar. The immediate impact of relative devaluation of dollar-pegged currencies will be a steady jump in import costs and cost-push inflation.
. . .
The US dollar's decline is one of the reasons why dollar denominated oil prices look so high, in other words, a significant portion of the oil windfall is being wiped out as the currency in which it has been priced is on a free fall. As oil is priced in dollars, with every depreciation in dollar value oil prices tend to rise.

Broad-based solution: Economists say that a broad-based solution could be revaluation of dirham against dollar. In the context of the revaluation of yuan and the depreciation of dollar against all major currencies around the world, the move towards revaluation of dirham is expected to gain momentum. Some economists even argue in favour of floating peg against a basket of currencies or even a full float of dirham.

Although a revaluation of the currency looks possible, economists and forex experts believe that abandoning of the peg or a free float at this stage can be more harmful to the country's interests. "The dollar peg has worked perfectly for the country. In addition, one should not forget that the country's main export item (oil) is priced in dollar and huge overseas assets of UAE investors and government are dollar denominated.''

Who are these "some economists" we're always hearing quoted? From what I read above it looks like the economists have all the alternatives covered. Some of them will be right.

I'm not pretending to be an international finance economist, but what I've been reading elsewhere suggests that the Chinese have come up with a clever way of saying they've revaluated (to satisfy cranky U.S. politicians) without really doing so.

UPDATE 7/27: Gulf News has more and names several economists interviewed.


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