The Emirati Dirham (AED) was stronger against the Pound (GBP) on Tuesday as the Arabic currency was supported by its peg to the US Dollar (USD). The strengthening American currency pulled the Dirham higher against Sterling and emerging market currencies on increased expectations that the US Federal Reserve will hike interest rates in the summer.
A rate rise in the USA could cap inflation in the United Arab Emirates and increase the value of investor holdings of US Dollar denominated assets. The move higher is also a positive for expats sending money home from the UAE. The US Dollar is pegged to the Dirham at an exchange rate of Dh3.67 to $1, which means that all changes in the price of the Dollar relative to other currencies affect the Dirham’s spending power.
The rise in the value of the currency is coming at a price however as a report showed that around half of the expats living in the UAE are contemplating leaving the country as the stronger Dirham increases the cost of living in the nation. A poll carried out by an expat newspaper showed that whilst 42% of expats said that their financial situation has improved, 50% of employed expats however said they are considering leaving the nation.
‘The majority of expatriates consider money and saving for the future as an important factor in moving to UAE. But the rising costs of living are increasingly holding them back from safeguarding the financial security they have been looking for, which makes moving out of the UAE a serious alternative,’ said a researcher at YouGov.
When asked how they were coping with the cost of living in the UAE, 56% said that it was somewhat difficult (40%) or very difficult (16%).
Also supporting the US Dollar and in turn the Dirham is increased demand for safe haven assets. The war against ISIS has intensified in recent days as Iraqi forces battle to recapture the city of Tikrit and the UAE has participated in the US led coalition airstrikes against ISIS targets in Syria. Concerns over the situation in Libya are also spooking the markets as ISIS militants captured a number of oil fields and abducted nine foreign workers.
Further losses for the Pound were restrained on expectations that the Bank of England will raise interest rates next year.