For many decades, pegging the US dollar against GCC currencies has been prevalent in countries like the UAE. This pegging principle started in the 1980s and is still a trend in Saudi Arabia and the UAE. However, today, with the changing world circumstances, financial experts think that the complexities of the global economy should be considered deeply for reconciling the USA dollar after assessing its volatility for moving on.
Kavan Choksi– Pegging of the American dollar and the benefits it carries for the Dirham
Business and financial market expert Kavan Choksi states that the above pegging of the American dollar with the Dirham of UAE is bringing the nation a wide range of advantages. It refers to the practice of attaching or tying the exchange rate of a currency to that of another nation’s money and involves the usage of rations that have been pre-set; this is why it is known as a fixed rate. Pegs are fixed for offering stability to the nation’s currency by linking it to another fast money with better economic strength.
Benefits of pegging for a nation
When a currency is pegged, it gains comparative trading benefits and can protect the interests of its economy. This fixed exchange rate helps the nation keep its exchange rates low, which benefits exports. At the same time, these pegged exchange rates can result in higher inflation in the long run, and maintaining it requires an extensive amount of national capital reserves. Moreover, whenever you convert the amount you will get the existing conversion rate. The fluctuation in the trade market will not affect the conversion.
What happens to the prices of assets in the nation during pegging?
The prices of assets can also be manipulated with pegging like a commodity and can be used to promote cross-trade after evaluating the currency’s foreign exchange rate. This leads to companies having thin margins of profits, and even if the foreign exchange rate fluctuates a bit, the profits can be aborted, and the business can lose a lot of money. Unless you are well aware, you can lose out on a lot.
How is the UAE benefitted?
The pegging of the USA dollar with the Dirham of the UAE has many advantages, and the first benefit of this peg is that the oil demand from other countries has raised the wealth of the states in the UAE. This wealth acquired from the oil sales can again be invested in companies in the USA to enjoy more returns. Moreover, pegging the American dollar with the UAE Dirham will ensure that inflation in the UAE is under control, leading to further economic benefits.
Business and finance expert Kavan Choksi observes that since oil is generally traded in US dollars in the global market, the GCC nations that export oil might peg their country’s currencies to it for more profits. For higher returns, these profits will go back as investments to companies in the USA, and with pegging practiced over time, it will manage inflation in these GCC nations with success!
