Why the 2010 currency union makes saving in dirhams a winner

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Why the 2010 currency union makes saving in dirhams a winner
AME Info, (Middle East) 09/29/08

Earlier this month the central banks of the GCC met to agree on further steps towards a limited currency union. This long-winded project is far from dead and the next announcements are likely to be the location of the new regional central bank and the formation of a monetary council to coordinate policy convergence for monetary union.These decisions will be passed to the GCC heads of state for ratification later this year.

And it is notable that the whole single currency project appears to have acquired a new sense of urgency.

Importance of single currency
Perhaps this is because unilateral currency revaluation has been passed over in favour of a united approach to monetary policy, and this has put a new emphasis on the importance of the single currency to the overall economic policy of the GCC.

It has been clear for sometime that the dollar peg has not been serving the best interests of the region, and arguably it has not been of benefit to the US either, as it has meant that the impact of rising oil prices has been greater on the US than Europe.

However, while unilateral revaluations have been kicked out of play, there has been an increasing realization that the creation of the common currency provides an ideal opportunity for adjustments of long-term misalignments in global currencies.

In that context the recent bounce in the value of the dollar has provided a breathing space as GCC central bankers plot a very different future.

Currency basket
What seems almost certain to emerge from the monetary council is a Gulf currency pegged to a basket of global currencies and possibly precious metals. Mexico has been looking at including silver as a counter to instabilities within its currency, and the Gold Dinar has occasionally been mooted in the Middle East.

However, the important point to note is not the positive implications for precious metal markets but that revaluation will likely emerge as a part of the final single currency project.

Currency bounce
Hence holding dirhams rather than dollars in a bank account makes sense. The two currencies are now interchangeable at a fixed rate. But at some point in the near future, and presumably by 2010 at the latest, there will be a re-alignment in value and holders of dirhams will get a one-off, one-direction bonus.

For those in the UAE with a savings account paying 2-2.5% at present this will come as a welcome bonus. It is also good news for owners of real estate and other fixed assets in the Emirates as there will be a one-off currency translation gain.

How large the realignment might be against different currencies, and whether precious metals might have a role in the currency basket, are matters that are likely to be keenly debated in the new monetary council.

But there is no prospect of devaluation, so this is a no-lose position for local investors who would be foolish to hold savings in dollars rather than dirhams.