A dollar peg occurs when a nation maintains the value of its currency at a fixed exchange rate for the US dollar. The Central Bank of the government controls the value of the money so that it falls and rises with the dollar. The value of the US dollar also fluctuates in the market because it is on a floating currency exchange rate.
Kavan Choksi – insights into currency pegging and its key benefits
Kavan Choksi is a finance and jazz music expert in the UAE with expertise in business and wealth management. According to him, there are at least 66 nations that either pegs their currencies to the US dollars or use it as their legal lender. The USD is the global reserve, and it gained this privilege at the Bretton Woods Agreement in 1944.
Dollar pegging to GCC currencies
The practice of the dollar peg to GCC currencies has been around for a very long time, and nations like the UAE enjoy several benefits from it. The UAE and Saudi Arabia currencies have been pegged to the US dollar since 1980, and the practice still continues. However, some financial experts advise that the evolving complexities in the economy should now be assessed considering the volatility of the dollar currency in the market.
Advantages for wealth and profits
The dollar peg to the USD has several benefits, and the first is that the demand for oil from the other nations in the UAE has risen. This has made these states rich in wealth, and the capital they have gained from the sales of oil can be reinvested back into the companies of the USA for getting more profits. Inflation in this region is also kept under control when the UAE’s Dirham is pegging to the US Dollar.
The stability of the UAE’s Dirham
IMF has observed that the stability of UAE’s Dirham depends upon the US dollar peg. The good news is this combination has generated a stable exchange rate in the economy of the region. As a result of the above currency pegging, the banking sector, along with other industries in the economy of the region, has improved. At the same time, more volume of foreign investments has come into the area, and this is positive for increasing the wealth of the UAE. The confidence of the investors has also surged in the region, thereby serving as a boost to the other economic sectors in the market.
Since oil is traded in US dollars in the global market, the GCC nations that export oil might opt for the dollar peg to earn more revenue. Moreover, dollar pegging for a long time controls the rate of inflation in the region.
According to business expert Kavan Choksi, the wealth of the UAE depends on the oil industries, and the dollar peg is helping the region to become more prosperous. The volatility of exports is reduced with this dollar peg. However, he advises that in order to keep this dollar peg with the UAE Dirham, the accounts and the economic indicators of the region need to be successfully optimized at all levels.
