Dubai: Bye to the Dollar?

DUBAI, United Arab Emirates, Oct. 8, 2007 — -- When you're a little country with great wealth, it used to be smart to peg your currency to the U.S. dollar. The greenback is a global behemoth and highly traded commodities — like oil — are often priced and sold exclusively in dollars.

So it makes sense that the United Arab Emirates pegs its currency, the dirham, to the dollar, just like its neighbors Saudi Arabia, Qatar, Oman and Bahrain.

But recently, the greenback has been declining in value globally, making some wonder whether the red-hot economy of Dubai could say bye-bye to the mighty dollar.

The UAE, which includes the financial powerhouse emirates of Dubai and Abu Dhabi, fixes its currency at 3.671 dirhams to the dollar. But a weak dollar means less purchasing power for countries like these, which have recently been on a high-octane spending spree.

Last month Abu Dhabi's state-owned Mubadala Development Co. bought a 7.5 percent stake in the Carlyle Group, a Washington-based private equity firm., for $1.35 billion. Within the same week Borse Dubai, the emirates' stock exchange, bought a 20 percent stake in the NASDAQ — and with it 5 percent voting rights.

Parting ways with the dollar would mean more than a stronger position when buying American assets.

A dirham weakened by association with the dollar makes the country less appealing to hundreds of thousands of expatriate laborers integral to the UAE construction boom. Moreover, with a peg in place the actions of the U.S. Federal Reserve largely dictate the emirates' inflation policy.

It was with the goal of containing inflation that the oil-rich country of Kuwait dropped its dollar peg in favor of a currency basket in May — a break with its five neighbors that compose the Gulf Cooperation Council.

UAE government officials remain committed to maintaining a unified council policy with the six member states together moving toward a goal of a unified Gulf region currency by 2010. That means holding the dollar peg, at least for now.

"For the UAE I can say comfortably and surely that we will not move alone and we will move with other GCC countries," UAE Central Bank Governor Sultan Nasser Al-Suweidi told Arabian Business this summer.

"We will all be together in it. No we are not ruling out, but we will have to move together," he said.