Pegging to the US Dollar – Implications

The UAE’s currency, the dirham is pegged to the US dollar at 3.67. What implications does this have?

Well, first it means that the UAE has a limited role in its monetary policy (this is true for countries using currencies of other countries – remember Zimbabwe and its hyper inflation moving to a foreign currency).

Also, since the US is a major consumer of the UAE’s oil, the stability of the exchange rate allows stability in the price of oil as it is expressed in US dollars in the market. It naturally maintains a balance between exports and imports and reduces uncertainty in international trade.

Canada’s currency isn’t pegged to the US dollar and it was brought up that this can sometimes cause volatility in our exports with our largest trading partner as when our currency appreciates relative to the US dollar (as we were recently flirting with parity), our exports become more expensive and can put pressure on our trade balance.