Chinese moves on yuan to raise dirham revaluation speculation
Posted on 10 April 2010 with 3 comments from readers
China looks about ready to allow the revaluation of the yuan this week in a move that will put speculation about a possible revaluation of the dirham back on to the agenda in the UAE.
Before the credit crunch 18 months ago the revaluation of the dirham was the subject of vigorous speculation. And it was one of the factors blamed for the influx of overseas cash into the economy that fueled up the local real estate bubble.
Local speculation
Holding cash on deposit in dirhams, and being paid interest, just in case the central bank revalued the currency to dampen inflation and money inflows, looked a no-lose position. Indeed it was as the dirham peg held and there was no chance of a devaluation.
But anybody hoping for a five or 10 per cent revaluation came away disappointed as this just did not happen. In fact, currency spreads tightened very slightly so speculators who pulled their money out suddenly lost a fractional amount.
Fast forward to the present day and the UAE Central Bank would no doubt welcome the return of some of this hot money. Banks complain that there is not enough money in their deposit accounts and so they have to pay higher interest rates to attract funds and this has raised the local cost of borrowing.
Small yuan revaluation
Beijing seems unlikely to do anything dramatic, however. Sources cited by The National today say there is to be a ’small but immediate revaluation’. Chief China economist at the Royal Bank of Scotland Ben Simpfendorfer reckons about two per cent, although many analysts have been expecting three to five per cent in the second half of the year.
Would it make sense for the Gulf States to follow suit, or the UAE to act alone? With oil prices surging this is not bad timing. Revaluation would stop inflation taking off again. And if global investors think the UAE is on a revaluation path then the inflow of new money could help support local real estate and equity prices and lower the cost of borrowing for business, at least at the margin.
However, a more immediate response would likely be a widening of the allowable daily trading range for the dirham as analysts told The National. That said with the UAE now looking to China as a future business partner then gradually aligning monetary policy with the next best customer is going to appear more and more sensible as time goes on.
3 Comments posted by readers:
In simple terms what would it means, would it mean to hold / keep monies in AED as it will strengthen in value in future or near future or will it devalue so when we convert we get less for our bucks, I discussed this to my friend who is an economist but failed to understand reading between the lines.
Please post your opinion so other could benefit.
Thank you in advance
Ed Note: Keep money in AED so it will appreciate in value, if they do decide to revalue.
Dubai is expensive as is. If they allowed their currency to appreciate then their tourism would take another beating. I don’t think it would be good for the UAE to allow their currency to appreciate nor do I think it is good for the Chinese to allow their currency to appreciate at this time either. We are definitely not of out of the woods yet.
Everyone may wish to read Ambrose Pritchard’s latest article ( 8 April ) about the warning of the size of sovereign debt, in a report by the Bank of International Settlements in the Telegraph.co.uk . The article is #1 on the finance most viewed list, for good reason. You can download the Bank report if you want to read it.
I think we can expect a lot of future inflation. That alone, could greatly increase the price of gold and oil. No way do I see politicians cutting spending enough to address the massive deficit problem. And the cuts necessary are so huge, that implementing them, or raising taxes enough to make a significant dent in the deficits, might cause another Great Depression, or worse.
I’m always amused whenever anyone tries to predict anything financial more than 10 years into the future. Remember when the USA was worrying about paying down too much of the National Debt back in the late 1990’s? And what do you suppose might happen to world trade if even one dirty bomb went off anywhere ? The markets might take a hit. Hopefully, we will never find out.