Complex Made Simple

Revaluation prospects make dirham deposits attractive

Contrarian investors are tipping the US dollar to bottom out this year, and possibly provide holders with an unexpected upside bonus. But a clever play to cash in on both this market boomerang and the likely revaluation of the UAE dirham is to hold your money in the dollar-pegged dirham.

Then you will benefit if the US dollar gets an uplift, and if – as 57 per cent of respondents to the HSBC Gulf Business Confidence Index believe – the UAE decides to revalue the dirham during 2008 this one-off benefit will also accrue to your savings.

After such a long plunge in the value of the US dollar against major global currencies it is naturally very hard to believe that the market could be about to change direction.

Yet the first point to note is that in terms of weakness against the Japanese yen and pound sterling the dollar has come off its lows of late 2007, albeit because Japan and the UK are now showing signs of economic weakness, particularly on property prices.

Dollar strength

But may be this is the trend for currencies in 2008: competitive devaluations as the US economic slowdown spreads to the rest of the world. At the same time a possible major correction for US equities would likely further rally the US dollar in a flight to quality and portfolio liquidation in favour of holding cash.

However, any bounce in the dollar is unlikely to weaken the case for revaluation of the dirham. The undervalued dirham is bad for the non-oil economy in the UAE by undermining international competitiveness.

For example, skilled salaries in India rose by 15 per cent last year and when combined with a 15 per cent revaluation of the rupee this means that UAE business needs to pay 30 per cent more for skilled expatriate labour in 2008 just to keep pace.

At the same time the undervalued dirham is importing inflation into the UAE as exports are priced in dollars and the majority of imports in other currencies. Nominal GDP growth of 16.5 per cent last year was crunched severely in real terms by high local inflation.

Revaluation pressure

The pressure on the UAE Central Bank from local business interests to revalue is therefore intense, and investors who back market forces against the stubbornness of central bankers are usually rewarded for their patience.

You do not need to be George Soros – who famously made a billion pounds challenging the sterling peg to the deutschemark in September 1992 – in order to benefit from revaluation.

It is quite enough just to hold cash in a humble dirham deposit account and to wait for market forces to work their way through the system. And the nice thing about this investment is that you have no downside whatsoever as nobody thinks the UAE could possibly decide to devalue rather than upwardly revalue its currency.

See also:
Foreign investors back UAE revaluation and negative interest rates
UAE revaluation confusion reigns
How revaluation would benefit UAE investors