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Chinese moves on yuan to raise dirham revaluation speculation

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littlekracker



Chinese moves on yuan to raise dirham revaluation speculation
10 April 2010

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.

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