UAE central bank will not follow US Federal Reserve

Gulf News

The UAE Central Bank said on Tuesday it would not cut interest rates if the US Federal Reserve eases its rate - the second time the country would refrain from mirroring the Fed.

Until late October, the UAE had been keeping its benchmark overnight repurchase rate at the same level as the Fed funds rate.

Then, in a shock move, the Central Bank decided not to track a 50-basis-point Fed cut on October 29, keeping its overnight repurchase rate at 1.5 per cent.

Today the Fed announced that it would cut it the rate to between 0 and .25 per cent -- the market had expected a cut to .5 percent. Actually, the Fed has been letting the rate track close to 0 for several weeks.

UAE central bank does the unexpected

Khaleej Times:

The UAE central bank surprised markets last week by not reducing interest rates following the 50 basis points reduction by the US Federal Reserve.
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In a research note “The United Arab Emirates: An Unexpected Decision,” Morgan Stanley commented that the decision not to lower rates may have been partly based on several factors.These include concerns over potential excess liquidity, reversal of speculative pressures on the dirham in forward markets and continuing concerns about inflation.
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The report also questioned the need for any monetary tightening, “It is not clear why additional monetary tightening would be needed to combat inflation considering that: (i) rental pressures are expected to stabilise over the next two years; (ii) international food prices have started to decline; (iii) the US dollar has appreciated significantly over the past 3 months; and (iv) credit growth is expected to slow down substantially over the coming year as the banks’ access to foreign funding is reduced.”

Other reports:
- The National
- Emirates Business 24|7

To peg or not to peg

The Financial Times answers the question

Countries such as the UAE cannot simply adopt a floating exchange rate, however. They are too small, and dependence on a volatile commodity makes it all but impossible to predict what their purchasing power will be the year after next, and what a sensible monetary policy might therefore be.

The Gulf needs to peg to something. A first step (after revaluation) would be to peg to a basket of currencies that included the euro and the yen. A bolder step would be to include the price of oil in that basket, so that currencies would appreciate when oil is strong, and depreciate when it is weak. That would make for smoother adjustments than double-digit inflation.

Brad Setzer has more.

Note to self

Get in the habit of reading the Financial Times Mideast page. Currently highlighted:

Saudis plan to grow crops overseas -Riyadh is in talks with Ukraine, Pakistan, Sudan, Turkey and Egypt to set up projects of at least 100,000 hectares to grow cereals that will secure its food supply- Jun-13

Output slides in Gulf in spite of oil boom - The region’s labour markets need to be modernised as research reveals productivity decreasing outside the oil and gas sectors, threatening sustainable economic growth - Jun-12

MidEast cools on smelter plans - Rising energy prices are causing oil-rich governments to change their minds about hosting large aluminium projects amid worries about giving away energy reserves cheaply - Jun-13

Viewpoint: Inflation fight involves painful choices - Higher oil prices drive up inflation in countries that import oil, but producers themselves face serious inflationary pressures when oil prices rise - Jun-11

Green light for de-pegging?

The National

The UAE and Qatar could abandon their currency pegs to the dollar and move to a basket of currencies within months, causing a five per cent appreciation before the end of the year, a Merrill Lynch report said yesterday [May 25].
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Saudi Arabia was unlikely to follow until late next year, Merrill said in the report entitled “US green light for the GCC”.

The US Treasury made mention of Gulf currencies for the first time “in recent history”, according to Merrill. The US investment bank took the focus on rising inflation as a sign that Washington no longer fears that the dollar will weaken significantly or that it will begin to lose its status as the world’s reserve currency if governments in the six-member GCC remove their pegs.

Removing the dollar peg would allow Gulf central banks to raise interest rates as a means of constraining money supply and controlling inflation. However, many UAE officials have spoken publicly against such a move because it could cause instability and reduce the value of their dollar-denominated savings in dirhams.

While recognising that the inclusion of GCC currency issues in the US Treasury report represented only “a modest change in focus”, Merrill concluded that it was nevertheless “a big signal for the currencies of the GCC”.

UAE workers riot

As reported in the Wall Street Journal:

SHARJAH, United Arab Emirates -- Protests and violent skirmishes over rising prices are hitting parts of the Middle East, a region already beset by strife but otherwise enjoying an unprecedented, oil-fueled economic boom.

On Tuesday, hundreds of workers demanding higher wages to counter soaring food costs rioted at an industrial park tucked amid this Persian Gulf emirate's desert scrub. They burned and battered dozens of cars and buses at an American-owned contracting company, then ransacked and set ablaze parts of the company's offices.
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Saudi Arabia, Qatar and the United Arab Emirates have all been socked with soaring inflation. Because they peg their currencies to the U.S. dollar, those currencies have followed its sharp fall.
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The region is heavily dependent on expatriate labor, many from Southeast Asia, who send much of their earnings home. As the value of their remittances falls with the dollar, they are growing frustrated.

That anger is now increasingly turning into violence. On Tuesday, hundreds of workers for Drake & Scull, an electrical and mechanical engineering contractor owned by U.S.-based Emcor Group Inc., rioted. The government put the number of workers involved at 1,500, while a Drake spokeswoman in Dubai said the number was much lower.

Some other reporting:

- Sharjah workers' riot brought under control - Sify News, India:

The situation in the Al Sajaa district of Sharjah, where around 1,500 workers of a sewage and maintenance company went on the rampage demanding salary hikes, has been brought under control.

The workers burnt office documents, broke glass facades of the first floor of the labour accommodation building and burnt and damaged vehicles of the company on Tuesday, according to the WAM news agency.

Director General of Sharjah Police Brig. Humaid Mohammed Al Hudaidi, accompanied by the Assistant Undersecretary of the Ministry of Labour, Humaid bin Dimas, labour officials and directors of police departments and civil defence teams rushed to the riot scene.

The anti-riot team surrounded the labour accommodation while the civil defence team put out the fires that had engulfed offices and vehicles.
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[Al Hudaidi] called on the workers not to resort to violence and subversion, leading to destabilization in the United Arab Emirates.

- Police quell subversive acts by 1500 labourers in Sharjah -Khaleej Times, United Arab Emirates:

Al Hudaidi noted that some even attempted to attack police and the labour officials at the riot site. He said that 15 days ago the workers had selected their representatives to submit their salary hike demands to the labour office. Based on those demands, the labour officials discussed the demands with the officials of the company, which is owned by a nearby emirate to Sharjah. It set up a labour accommodation site in Al Sajaa district.

“Even before the workers received reply, a group of workers incited them to go on rampage and burnt vehicles and properties of the company,” Al Hudaidi said....

- Emirati Police Break Labor Strike -The Associated Press: "Police said that at least 500 workers carried out "subversive acts" at a work camp in the emirate, or state, of Sharjah, according to the official state news agency, WAM."

- Violent uprising - 7DAYS, United Arab Emirates - Mar 18, 2008By Fareed Rahman A labour protest turned violent in Sharjah yesterday, with 3000 angry workers setting light to vehicles and a storeroom at their camp.

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.

Central bank governor denies reports

Dow Jones Newswire

United Arab Emirates Central Bank Governor Sultan bin Nasser Al Suwaidi may step down amid continuing pressure for the Gulf state to drop its dollar peg, according to people familiar with the matter.

Officials at the central bank, who declined to be identified, told Zawya Dow Jones that a change could happen as early as Dec. 18, with Saeed Mubarak Rashid Al Hajeri, current chairman of Abu Dhabi Commercial Bank tipped to take over.

The governor's office didn't respond immediately to questions from Zawya Dow Jones about whether Mr. Al Suwaidi will be stepping down.

With inflation in the U.A.E. expected to exceed 10% this year Al Suwaidi, a veteran at the central bank, has come under increasing pressure to abandon the country's currency peg with the U.S. greenback that has lasted since 1973.

The U.A.E. dirham is fixed at a rate of 3.67 to the dollar and like other Gulf Cooperation Council countries the central bank has closely copied U.S. Federal Reserve decisions to cut interest rates.

News of Suwaidi's possible departure comes on the same day that the U.S. Fed is expected to cut interest rates for a third straight time to deal with a prolonged housing slump and tight credit markets.

Gulf News

United Arab Emirates Central Bank Governor Sultan Bin Nasser Al Suwaidi denied a Dow Jones report that he was planning to step down as early as December 18, the news agency WAM reported on Tuesday.

"This report is absolutely not true, it is baseless and worthless," Suwaidi said, according to WAM.

Weakened Dollar Slows Dubai Tower's Race to the Skies

The Washington Post

U.S. policymakers and consumers have committed one of the few unforgivable sins in this desert boom town: They've slowed the building down.

"We don't want the United States to fail, but we don't want to go under with them," said Yasar Narrar, a strategy adviser to the executive office of the ruler of Dubai, Sheik Mohammed bin Rashid al-Maktum. Dubai is one of seven states in the United Arab Emirates.

Last month, the Emirates became one of the first Arab countries in the Persian Gulf to declare the dollar's fall a crisis. Local currencies' peg to the dollar was hindering growth and squandering the opportunities presented by $99-a-barrel oil, said Sultan Nasser al-Suweidi, the governor of the Emirates' central bank.
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As recently as last month, some construction workers on the Burj Dubai and other projects made the equivalent of as little as $109 a month. Back home in India, where the dollar has fallen 14 percent against the rupee in the past 18 months, remittances that workers here sent to their families steadily lost value.

"I work here, and I can't save anything. I'll ruin my family," said Ram Chandra, 33, a mason from the north Indian state of Rajasthan.
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"Every time I telephone my family, they say, 'Cancel your visa and come home,' " Chandra said. All the workers in the room said they planned to do so.
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"It's far more attractive for them . . . to be living in their home country and making the same wages and living far more cheaply," said Tom Barry, general manager for Arabtec, one of the lead construction contractors for the Burj Dubai.

Governor: "No need for revaluation"

Gulf News

Frankfurt: The UAE central bank said yesterday it would leave its dollar peg unchanged for the "foreseeable future" after Gulf rulers agreed to keep any currency reform talks secret to calm markets.

UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi, who complained last month he was under growing pressure to drop the peg and track a currency basket, said yesterday there was no need to allow the dirham to rise against the tumbling dollar.
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The remarks were Suwaidi's first since a Gulf Arab summit overshadowed by disagreement on currency reform between Saudi Arabia and the UAE, the two largest of six economies preparing for monetary union as early as 2010.
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Al Suwaidi had nourished market expectations that the UAE and some of its neighbours would change currency policy when he said in a Tokyo speech last month the dollar's decline had taken his country to a "crossroads" on dirham policy.

In a subsequent interview, Al Suwaidi said he was under pressure from "communities and companies" to drop the peg and track a currency basket.
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Saudi Arabia dismissed any suggestion of an end to its dollar peg at the summit which ended in Qatar on Tuesday.

As if to confirm we see this late morning update now at Gulf News:

Published: December 06, 2007, 10:15

Dubai: The UAE Central Bank has cut its main interest rate by 15 basis points to 4.5 per cent. The move brings the UAE into line with the US Federal Reserve's benchmark interest rate. Analysts say it is a clear sign that the UAE is sticking with the dollar peg.

Yesterday Marios Maratheftis, head of research for the Middle East at Standard Chartered was quoted as saying, "Within the next two months, the GCC will likely revalue" said yesterday. ... "The question is whether or not they will drop the pegs - ultimately a political decision."

Central Bank turns tables on money changers

Yesterday's post was entitled Money changers throw out the dollar. Anticipating a revaluation, UAE money changers were not willing to buy dollars at the official rate.

The Central Bank is now saying the money changers must defy the law of gravity (r.e., the market forces of supply and demand), and obey the official rate. The Gulf News reports:

The UAE Central Bank on Monday directed money exchange houses to refund to their clients any differences arising from purchasing US dollars at rates outside the official band on the weekend.

The Central Bank has asked persons involved to approach its Dubai office with original invoices within a month. "The Central Bank will arrange with the money changers to send the difference amounts to their addresses," the statement said.
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Exchange firms widened the spread between the dollar's buying and selling prices to Dh3.35 and Dh3.685 respectively on December 1 and 2, compared to the rates prevailing on the previous day of Dh3.65 and Dh3.68 set by the commercial banks.
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[T]he central bank considered the move a clear violation of its regulations and warned exchange firms of severe penalties if it happens again.

There's no statement about what the severe penalties would be, or why -- given that the regulations were so clear -- there were no penalties this time.

What will happen when the money changers must choose between a regulatory penalty and the penalty of financial lost? They might simply close their exchange window.

Meanwhile, the two day summit of GCC leaders has concluded with no dollar announcement:

[T]he final communiqué, to be released later, will not make reference to the burning issue of the declining US dollar to which most Gulf currencies are pegged, official here have said.

UAE money changers throw out the dollar

There's the official rate and there's the market rate. The official rate has become untenable in the eyes of the market.

Gulf News says one of them is arbitrary

Arbitrary dirham rates offered by UAE money changers, in some cases as low as Dh3.05 per dollar or almost 17 per cent lower than the official rate, are sowing more confusion in the market where speculation on the dirham's revaluation is already rampant.

The UAE currency has been pegged at 3.6725 to the dollar since 1997 and until Sunday there was no change in the official peg.
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Money changers, hotels and stores in shopping malls were accepting dollars at rates ranging from Dh3.05 to Dh3.50 per dollar yesterday.
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"It is strange," said Ahmad Jan from Saudi Arabia as he walked between a bank branch and a money exchange at Deira City Centre and noted that the bank offered 60 fils more per dollar.

"What you see here is the official rate," a manager at the bank said.

Moroccan visitor Nasser Bin Omar said he accepted the lower dollar rate from the money dealer because he did not want to wait in the long queue at the bank.

Ah, yes, opportunity cost. The time cost of waiting. If the same thing is being sold at two different rates, where do the queues occur?

See, also, yesterday's story in the Gulf News,

UAE cautions markets against betting on dirham revaluation
The UAE warned markets against betting on a dirham revaluation as investors piled pressure on the region's dollar pegs, expecting Gulf states to change currency policy at a summit this week.
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In remarks carried by the Al Khaleej newspaper, [Central Bank Governor Sultan Bin Nasser] Al Suwaidi moved to quell investor expectations that a change was imminent.
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Bahrain's central bank threatened to take action against anyone betting on dinar appreciation and accused foreign banks of spreading revaluation rumours, the Middle East Economic Digest reported after an interview with Governor Rasheed Al Maraj.

Dollar peg at the crossroads

Gulf News

The UAE Central Bank Governor yesterday hinted at a potential change in the UAE's exchange rate policy currently anchored on fixed peg against the US dollar.

"The dirham's peg to the US dollar has served the economy of the UAE very well in the past. However, we have reached the crossroads now with a further deterioration in the US dollar and expected further weakening of the US economy," Reuters quoted Sultan Bin Nasser Al Suwaidi as saying in Tokyo yesterday.

Analysts saw the statement as a clear shift in central bank's stand on the peg.

Sitting ducks are on offer :: Telegraph

Back in October, in The Telegraph

The wolf packs are circling. Fifteen years after George Soros smashed the sterling and lira pegs of Europe's Exchange Rate Mechanism, central banks have invited hedge funds to pounce again. This time on a global scale.

Sitting ducks are on offer across Eastern Europe, the Middle East and emerging Asia, each offering an irresistible one-way bet for speculators with deep pockets.

What the candidates all have in common is inflation, the ever-higher penalty they pay for chaining their destinies through currency pegs and dirty floats to the dollar and the euro, the currencies of two enfeebled blocs – one a fat roué at the end of his credit, the other a stooped old gentleman with a stick.

The global M3 money supply is growing at 10.6pc as stimulus from America, Europe – and Japan, through the carry trade – leaks out to the vibrant parts of the world economy.

Money is expanding at 18pc in Saudi Arabia, 19pc in China, 24pc in India, 36pc in the United Arab Emirates, 41pc in Russia and 69pc in Venezuela.

With the usual lag, inflation has at last hit. Prices are rising at 6.5pc in China, 9pc in Russia, 9pc in Vietnam, 11pc in the UAE and 12pc in Qatar – to name a few.

Only nations with very rigorous monetary regimes seem able to resist this tide of liquidity. Most are floundering. Hence the rush by investors to profit from these unrestrained bubbles by piling into their stock markets.

Kuwait became the first Gulf state to ditch its dollar peg. Others are hanging on, but inflation has reached 10pc in the United Arab Emirates and 11.8pc in the gas-rich neighbour of Qatar.

They have balked at cutting interest rates in lockstep with the Fed. So have the Saudis. This makes pegs untenable over time. Matt Vogel, of Barclays Capital, says a riyal "carry trade" has already begun in Saudi Arabia. Speculative flows are surging into the kingdom.

The Gulf region has $3,500bn under management in reserves and wealth funds. It has the firepower to shoot wolves, but does it make any sense to do so? Buying dollars leads to even more inflation. In any case, Qatar has already slashed the dollar share of its $50bn investment fund from 99pc to 40pc. The game is up.

Further east, Vietnam is throwing in the towel as inflation hits 9pc. It said it will no longer hold down the dong by massive purchases of US bonds.

Plenty of metaphors on offer as well.

If you've not watched this informative video it is well worth your time:

Dirham under fresh pressure :: Gulf News

Prepare for depegging? (Updated)

9 Nov - Gulf News

The UAE or Qatar may drop their currencies' pegs to the dollar within six months as inflationary pressures outweigh the benefits of maintaining the links, Merrill Lynch & Co said.

"We believe there is a significant risk of a change in the policy regimes of either the UAE of Qatar in the coming six months," Merrill Lynch said in a research note yesterday.
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The central bank governors of Qatar, Oman, Bahrain and Saudi Arabia have all said a number of times since May that they have no plans to drop their currencies' pegs to the dollar.

Of course "no plans" does not equal "won't."

The Wall Street Journal, page A2, November 2, 2007 (subscriber link)

DUBAI, United Arab Emirates -- Oil-rich Arab sheikdoms, risking new inflation pressure, followed the U.S. Federal Reserve's lead by lowering official interest rates to keep their currencies aligned with the dollar.

Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and Bahrain followed the Fed's decision to cut interest rates by a quarter percentage point.
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The moves came despite concerns over rampant inflation in the region, which suggest central banks should be raising, instead of lowering, rates. Bankers said the policy conflict is building pressure on the Gulf states to unbind from the dollar.
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With inflation expected to exceed 10% for a second consecutive year in the U.A.E., the emirates' ruling sheiks face the region's greatest fiscal policy challenge since the U.K. devalued sterling in 1967, forcing Gulf states to turn to the dollar as a benchmark.

When the emirates created the dirham in 1973 they linked it effectively to the dollar. Now bankers such as Deutsche's Mr. Azzam are unsure whether the U.A.E. is ready for another such change. "I don't think a depeg will happen because that's a regional decision and it has served the U.A.E. so far," he said.
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Nowhere in the Middle East are the strains more acute than in the U.A.E., where investors are betting on a "depegging" of the dirham as domestic inflation pressures increase.

"Speculators are definitely bidding on a depegging, and that's why they're increasing their dirham deposits," Henry Azzam, Middle East chief executive at Deutsche Bank AG, told Zawya Dow Jones Newswires in an interview.

Attracting that money are chances of a quick profit once the peg snaps. Deposits held in the emirates' banks have exceeded one trillion dirhams ($272.3 billion) for the first time, more than is deposited in the region's largest economy, Saudi Arabia, latest central-bank figures show.

"The probability of depegging has increased," said Kamran Butt, Dubai-based chief economist at Credit Suisse Group. "The market consensus is for the U.A.E. to depeg."