Exchange Rate Risk in the UAE - Essay Example

Due to the growing population in UAE, the construction activities for hotel, condominiums and commercial and entertainment infrastructure are increasing and directly contributing to growing interest rate of the currency. The most dominant factor of the financial market in the United Arab of Emirates is been Banking Sector, which is intermediate between common man and economy as it endows with the credit conveniences to the same. And hence the demand for the credit is increasing which is also causing to increase in the rate of currency, but contradictorily in point of fact this is harmful.

Since there is an expansion in the financial markets, the banking sector are benefited the most and can maintain the profitably and exploit most in this market. The liberalization of the country demands the overseas banks to invest, seeing that United Arab of Emirates can come into sight of global economy. An increase in lending money or mortgaging activities from the banks, can risk the cost-cutting measure of the country, therefore banks should perimeter it. The growth of the economy is taken care by the government for improvement among the financial systems.

The supervisory body (Emirates Securities and Commodities Authority) is been given the responsibility of Initial Public Offerings in January 2007. Global investors should be invited to expand the capital markets in United Arab of Emirates by getting rid from the board membership. As suggested there should be a legal format for all the financial markets which will lessen the arguments. The major drawback of United Arab of Emirates is that the unmethodical insurance segment, and to enhance the market segment, this segment should be privatized.

The high standard of living, productivity has caused the inflation in the economy of the United Arab of Emirates. US interests are not hooked up with flexible monetary policies. The high oil prices causes inflation and leads to major problem in the economy of United Arab of Emirates. Hence monitory policies should be independent, not confined to the interest rate of the compared currency and more effective. The cause of rise in the inflation was due to the rising cost of accommodation. This will lead to threat in cost of living which can cause the local economy.

As a result this should be stopped. UAE Currency Markets The US dollar and the United Arab of Emirates dirham are hooked up at the rate of 3.6710 and similarly the Great Britain Pound (GBP) shifts directly with the US Dollar as well as AED.Source: http://www.dubaiselect.com/dubai_property_services/financial-services/the-currency/ As shown in the above chart, GBP/AED moved from high in May of 6.9860 to a low of 6.6398 in June which on an AED 1,000,000 property would be an increased cost of 7,464 in less than two months.

The currency fluctuations create instability in the financial markets which would affect in decision making for the acquisition of the property. This also avoids in the need of the development. But as soon as this hook is been broken between the US Dollar and AED, the instability in exchange rate and interest rate would generate a necessity amongst the short term and long term risks proficiently. The trading countries like Australia, Africa and other Arab countries, deal United Arab of Emirates with the US Dollar and thus major of trading or imports is done in US dollars.

Hooking up with US dollars is not advantageous for the United Arab of