Whilst the forex market is renowned for its liquidity and volatility, it’s fair to say that some currencies offer a far greater degree of stability than others. Take the U.S. Dollar (USD), for example, which features as part of 84% of all currency trades and accounts for an estimated 38% of the world’s debt.
The USD has also performed well of late, having strengthened to a 12-year high at the end of 2016 and continued to make gains against other major currencies including the Euro (EUR) and the British pound (GBP) since the Brexit vote.
The durability and strength of the greenback also partially explains the relative growth of the UAE dirham, as this currency is pegged to the USD and continues to leverage this advantage through a high volume of international investments. But why else is the dirham performing so well, and how does this relate to the strengths of the UAE economy.
Beyond the Dirham – A Look at the UAE’s Economic Policy
Recently, the EMD revealed that the dirham was ranked 24th in a list of the most stable international currencies in terms of exchange.
This meant that it was considered to be more stable than several Asian currencies, including those in China, Hong Kong and South Korea. As a result, forex trading is becoming increasingly popular, particularly in a volatile economic climate.
This trend is likely to continue for the foreseeable future at least, and aside from the dirham’s intrinsic links to the USD there are other factors that continue to underpin its growth.
The most obvious is the diversification that has gripped the UAE economy during the last decade, which initially helped the nation’s GDP to grow by 5% in 2011.
The economy has largely continued on an upward trend in the eight years since, as risk appetite has continued to grow whilst various sectors of the economy have benefitted from significant overseas investment.
More recently, we’ve also seen the UAE’s economy thrive despite falling oil and energy prices, which have plunged due to the failure of the OPEC to regulate supply levels across the globe. This is thanks to the efforts of diversification, with total, no-oil activity in the UAE accounting for 71% of GDP in 2017.
Economic growth is also expected to continue well into 2019, with increased government spending in infrastructure creating a wealth of new jobs ahead of Expo 2020. This is a universal exposition that will be held in Dubai, and this will also coincide with growth in the production of natural gas and similar resources.
Investments will also strengthen in 2019, against the backdrop of higher fiscal revenues and the cycle of continued growth. This will support progressive initiatives such as the three-year AED $50 billion stimulus project, which seeks to drive growth and create jobs in the burgeoning tourism sector.
Such sustained growth is also helping to support household spending and private consumption, which came under pressure as a result of higher fuel prices and a new VAT rate in 2018.
This is great news for the economy, which continues to support the dirham and underpin its appeal as a relatively stable currency.
The Last Word
There’s no doubt that the UAE dirham has performed well of late, thanks largely to its close relationship with the USD.
It has even made significant gains against similarly emerging currencies such as the Indian rupee, which tumbled to 19.36 against the dirham recently.
However, the consistent growth and performance of the dirham is also being underpinned by a growing and increasingly diverse economy, and one that is now far less reliant on natural resources such as oil than at any point in history.
Also published on Medium.