Why is AED Pegged to USD?
The United Arab Emirates Dirham or AED is pegged to the U.S. dollar. This makes it among the world's most stable currencies. In this article, we are going to discuss why the UAE pegs its Dirham to the US dollar at a fixed rate. So, if you want to know why it
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How is Dirham Pegged to US Dolar?
As determined by the Central Bank of the United Arab Emirates, UAE Dirham (AED) is officially pegged to the US Dollar (USD) at a fixed exchange rate.
❓What is a currency peg? when a country’s government or central bank sets its currency's value to stay fixed and stable at a specific rate compared to another currency.
The buying rate is set at 3.672 AED per 1 USD, while the selling rate is slightly higher at 3.673 AED per 1 USD.
This fixed exchange rate ensures stability in the value of the UAE Dirham relative to the US Dollar, regardless of fluctuations in the global foreign exchange markets. To check AED exchange rate to other major currencies check out the link.
Benefits of AED Pegged to USD
You may wonder why the AED Peg to the USD is Beneficial. Businesses, investors, and residents in the United Arab Emirates benefit from a predictable and consistent valuation of the Dirham, reducing the risks associated with currency volatility.
This pegged system has been in place for several decades and plays a crucial role in maintaining economic stability. It facilitates international trade and enhances investor confidence in the UAE’s financial system.
Let us explore the key reasons why the UAE Dirham remains pegged to the US Dollar and the benefits it provides to the economy.
Ensuring Economic Stability
A fixed exchange rate provides economic stability. This peg minimizes the risk of currency fluctuations. The United Arab Emirates is a global business and trade hub. The country needs a stable currency that prevents drastic valuation changes, otherwise trade and investment will be impacted.
Strong Trade & Economic Ties with US
The United States is one of the UAE’s largest trading partners. Significant imports, exports, and investments flow between the two countries. Pegging the Dirham to the US Dollar helps stabilize trade relations. While businesses and investors benefit form import and export costs remaining predictable.
Oil Trade & Dollar Dominance
The United Arab Emirates is a major oil-exporting nation, and crude oil transactions are primarily conducted in US Dollars. By pegging the Dirham to the Dollar, the UAE tries to manage the risks associated with currency fluctuations in global oil prices.
💡As you may know, oil exports are a key driver of the UAE economy and this stability helps maintain steady revenue from them.
Attracting Foreign Investment
A fixed exchange rate makes the UAE an attractive destination for foreign investors.
All investors prefer economies with stable currencies to reduce exchange rate risks and increases the predictability of returns.
AED being pegged to USD reassures businesses, multinational corporations, and expatriates that their financial assets in the UAE will retain value without the uncertainty of currency devaluation.
Controlling Inflation & Interest Rates
By pegging the Dirham to the US Dollar, the UAE can align its monetary policy with that of the US Federal Reserve. This is why the UAE maintain low inflation and stable interest rates. These two factors are crucial for economic growth.
Everyone knows that the US Dollar is one of the most stable and widely used currencies in the world, this peg prevents excessive inflationary pressures while there are no currency fluctuations.
Boosting Confidence in the Financial Market
The United Arab Emirates is home to a thriving financial sector, including international banks in the UAE, stock markets, exchanges, and real estate investments. A stable currency offers confidence in the financial system. In the UAE, investors and businesses are assured of minimal currency risks when conducting transactions.
Maintaining Competitive Advantage in Trade & Tourism
The UAE is a global tourism and trade hub. The country attracts millions of visitors and international businesses every year. A stable currency pegged to the USD ensures predictable pricing for tourists and businesses. That is why the UAE is an attractive destination for global travelers and enterprises.
Also Read: The Best Currency to Take to Dubai When Traveling
Why is AED So Stable?
USD peg is key pillar of the UAE’s economic strategy. The decision to peg the UAE Dirham to the US Dollar has proven to be a strategic move by the United Arabe Emirates Central Bank.
The Stability of Dirham has contributed to economic growth, financial stability, and investor confidence. The peg ensures stability in trade, reduces risks associated with currency fluctuations, and strengthens the UAE’s position as a leading global business hub.
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