The principle of pegging GCC currencies to the American dollar has been around for several decades, serving multiple benefits for nations like the UAE. Since 1980, the currencies of Saudi Arabia and the UAE have been pegged to the USA dollar and continue till this date. In context to the above, financial experts think that the complexities of the world’s dynamic economic conditions should now be considered as it is time for the globe to reconcile the USA dollar after evaluating its volatility and move on.
Kavan Choksi– How is Dirham benefitted?
Kavan Choksi is a finance expert. According to him, the US dollar pegging with the Dirham has several benefits; however, to understand these advantages, one must know what the meaning of pegging is.
Pegging and what it means in the currency market?
Pegging means binding a currency rate to another currency rate of a stronger nation where the central banks look after the operations in the market for stabilizing this currency by locking it with against another country that is more secure.
Manipulation of the asset prices
According to him, pegging can be referred to as a process for manipulating the asset price, similar to the underlying method of a commodity. It is used for the promotion of cross-trade after assessing the rates of foreign exchange of this currency. Several companies have skinny profit margins, and even if the foreign exchange rate changes a little, profits are aborted, and businesses are endangered.
How is the exchange rate of the UAE getting helped?
The pegging of the USA dollar with the UAE Dirham has many benefits, and the first one is that the demand for oil from other nations has increased the wealth of the UAE states. The government’s capital from oil sales can again be reinvested in companies in the USA to bag more significant returns. Pegging the US dollar with the Dirham will also control inflation in the UAE.
When oil is generally traded in dollars in the global market, the GCC oil exporting countries might peg their local currencies to the American dollar to get more profitable returns. Financial experts view the prime benefit of pegging the Dirham to the US dollar to increase the country’s wealth. In order to retain this peg, the economy’s indicators and its accounts should be kept at optimal levels.
Economic stability and its maintenance
IMF observed that Dirham’s stability depends on the pegging of the US dollar and how the fixed exchange rates are retained. The above trend helps the banking sector as it attracts a large volume of foreign investments. It benefits the economy as a stable rate can be maintained regarding exchanges.
According to Kavan Choksi, the above trend increases investors’ confidence in the country. It serves as a significant boost to the other economic sectors in the UAE as well. For a country to sustain, its economic growth and development is vital. Many countries have been wiped out because they did not have a strong economy.
