Thursday, January 24, 2008

Market expecting Fed to cut rate substantially, again

Because the UAE pegs the dirham to a fixed amount in terms of the dollar the government banking authorities here must follow the Federal funds rate downward (in the present case), otherwise there would be a rush of conversion of dollars into dirhams to get the higher return; the peg would become unsustainable. There have been doubts expressed about whether the peg is sustainable in any event. Here is the latest example:
Although the UAE Central Bank's insist that it would neither opt for a revaluation of dirham nor move away from the US dollar peg, currency experts and economists say the revaluation is impending. They say the dirham is currently 30 to 35 per cent undervalued against the US currency.

Economists said to ward off further inflationary trends, dirham has to be strengthened against other currencies by switching to a basket of currencies as Kuwait and Syria had done. For this the UAE has to undertake a series of currency arraignments to ensure the true value of its currency.
Traders believe another substantial cut in Federal Funds rate coming soon. Currently at 3.5% (350 basis points) the betting is it will be at 3% before the end of the month.

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