Each of your hard-earned dirhams is fixed to the US dollar at Dh3.67.

While you may not have considered this important in the past, it is high time that you do.

On the Fed front, the dollar, and hence dirham, weakened against the euro, the British pound, the Japanese yen, the Indian rupee and even the Canadian and Australian dollars.

"We can definitely see the US dollar coming down in the next few months," says Hemendra Ghaghada, the chief trading analyst with Dubai-based foreign exchange trading firm Emirates FX.

If you are like other expatriates, you take your monthly salary in dirhams so you would be wise to do everything you can to guard against currency fluctuations in the coming months.

The first step, experts say, is to understand why currencies move in value. In general, the value of a currency ver sus other currencies reflects the condition of that country's economy. Many factors may cause the market price of a currency to fluctuate, including monetary and fiscal policy, political conditions, economic indicators, interest rates or inflation.

Ghaghada says that because the Fed had been increasing rates for two years, the US dollar "did not lose as much ground as it should have based on economic fundamentals".

The US GDP growth has slowed, unemployment has risen, its trade deficit has widened and its budget deficit is steep.

The dollar will fall against most major currencies over the next year with US interest rates at or near their peak and a gaping current account deficit coming back into focus, according to a Reuters foreign exchange poll.

In other words, the US economy is weak on a number of levels, and the dollar, and hence dirham, will suffer because of it.

"Interest rate hikes were the only holding factor for the strength of the US dollar," Ghaghada said.

"The rest of the news is negative. The US economy is not doing well. We will definitely see the US dollar sliding."

By choosing to work in the UAE, you have to live with the fact that the currency is pegged to the US dollar and sometimes it is stronger and sometimes it is weaker.

But there are some steps you can take to help your money go further.

Finding a balance
Murray Sims, the head of personal banking at RakBank, recommends trying to renegotiate your contract with your employer to get 50 per cent of your monthly salary in dirhams and 50 per cent in your home currency.

But most employers would likely not be prepared to concede to this demand.

Sims, hence, suggests trying to keep as much of your surplus money locally in a highinterest bearing account or in other assets, such as property, so that you do not keep paying punitively for foreign exchange. He also advises expatriates to refrain from investing in sterling or euro assets that require borrowing.

But for many expatriates, sending money home is unavoidable to help out with family finances, to pay for mortgages or to cover student debts. If this scenario fits your description, and you are not interested in getting into foreign currency trading, it would be "sensible" to open a savings account at your bank in your home currency.

If you have a euro account, for instance, you can convert money using your online banking account more easily and more regularly. By doing so, you will be more likely to balance out the currency fluctuations and avoid being hit all at once when you need euros months down the line.

The bottom line, experts say, is to keep yourself informed about how your home currency is moving against the US dollar.

Most newspapers and online news services provide regular updates on currency moves. In the United Kingdom this week, for instance, the British pound lost some ground against global currencies on the heels of political news that the government had foiled a planned terrorist attack on the country's airlines.

Still, the long-term potential of the pound is strong against the US dollar.

"I would say the only way to safeguard yourself is to pay attention to the currency moves every week," Ghangada said. "Read the news, get to know how and why the currency prices are moving. This will help you make better informed decisions on how to handle your money."

Currency movements
If you send money to your home country regularly or are planning to travel home in the coming months, you will need to convert dirhams into your home currency, and that will cost you more in a few months than it will now. Currency traders provide you here with a glimpse of how they see currencies moving for the next three to five months.

Euro
Brace yourself if you are an expatriate from Europe. Currency traders are expecting that the euro will break out of a three-month trading range of $1.24 to $1.28. They say that the euro will reach $1.31 to $1.32 in the coming months and possibly higher. Already the dollar was at $1.29 per euro this week. The European Central Bank increased interest rates last week and said this scenario will continue so holding euros will continue to be more attractive than holding dollars.

UK Pound
The UAE's large British population will see their salaries dwindle in real terms. The British pound is poised to move up alongside the euro also due to the Bank of England's move to increase its basic interest rate last week. Sterling has been trading from $1.82 to $1.87 in the past few months and now currency traders see the pound reaching levels of $1.91 and $1.92. It had already entertained offers this week at the $1.911 level, prior to news of the foiled alleged terrorist plot to bomb commercial passenger flights, which could place downward pressures on the sterling.

Indian Rupee
Once the Fed paused its two-year rate rising campaign, there was some concern that possible US economic slowdown could hurt Indian exports, which prompted the rupee to weaken against the dollar. But the partially convertible rupee climbed to 46.46/47 per dollar, higher than the 46.53/54 it had closed at before the Fed pause. So Indians, too, will face a loss of purchasing power, although not as pronounced as their European counterparts.

Canadian Dollar
The Canadian dollar rose against the greenback this week, too, climbing above 89 US cents on news of the rate freeze. Currency traders in Canada said the Fed decision to hold interest rates clears the way for the Canadian dollar to touch 90 US cents again, since the interest rate differential between the two North American countries is no longer getting wider. The Canadian currency reached 91.44 US cents on May 31, the highest since 91.47 US cents on January 4, 1978. The upward trend means it will be more expensive for Canadians working and living in the UAE to send money home.

Australian Dollar
Currency dealers said the Australian dollar jumped to a high of $0.767 this week as a result of the weakening US dollar. How the Australian currency moves further will depend on the country's economy's growth in the coming months, but a weaker US dollar overall does not bode well for the strength of the dirham against the Aussie dollar.

Yen
Japanese expatriates in the UAE are also likely to feel the pinch, traders said, as they expect the yen to be the biggest gainer against the dollar over the coming year. The dollar has been trading between 111 yen and 118 yen during the past few months, and is poised to break the 110 yen mark, according to currency traders. Following the Fed announcement, the dollar did drop to 115.07 yen.

Yuan
On the news of the Fed freeze, the People's Bank of China fixed the reference rate for Chinese yuan trading at 7.969 against the US dollar, compared with 7.977 prior to the announcement, the strongest fix since the currency was revalued in July 2005. So, if you are a Chinese expatriate, you will get fewer yuan for your dirhams in the next few months.

By Daliah Merzaban

© Emirates Today 2006

 

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