The UAE dirham has been pegged to the US dollar at a rate of 3.6725 since November 1997. This peg has been instrumental in stabilizing exchange rates, supporting trade, and reducing financial risk within the region. Recently, the Central Bank of the UAE cut interest rates for the second time in November 2024 as part of efforts to boost the economy amid changing global economic conditions [e5360c53].
The stability provided by the dollar peg has greatly benefited the UAE's oil exports, which are priced in dollars. However, there have been discussions about potentially diversifying the peg to include a basket of currencies. Despite these discussions, the Central Bank has expressed confidence in maintaining the current dollar peg, recognizing that it limits monetary flexibility and closely aligns UAE economic policy with that of the United States [e5360c53].
In light of recent economic developments, including a decrease in inflation rates in Dubai and speculation regarding a potential interest rate cut by the Central Bank, the implications of the dirham's peg are becoming increasingly significant. As the US Federal Reserve considers its own interest rate adjustments, the UAE's monetary policy may also be influenced, leading to further scrutiny of the dirham's long-standing peg to the dollar [92c73270].