Pursuant to United Arab Emirates (2008), dirham deposits get attractive due to the positive revaluation prospects. The tactics applied by contrarian investors is to tip the US dollar to the bottom line. As a result, holders will be benefited with an unexpected upside bonus. However, one should note that cash maneuvers assume the possible revaluation of the UAE dirham, and therefore money should be held in the dollar-pegged dirham. It is therefore sufficient just to hold deposits in a shaky dirham accounts and wait until market forces impact the economic system.

According to HSBC Gulf Business Confidence Index, holders may benefit from the US dollar uplift since the UAE will revalue the dirham over 2008. Even such one-time benefit will considerably accrue holders’ savings. Considering a long plunge of the USD value in relation to major global currencies, the market is unlikely to change current direction.

It is apparent though that any fluctuations in the USD rate will not weaken the UAE economy and cannot revalue the dirham. Apparently, non-oil sectors in the UAE economy will suffer as their international competitiveness will diminish once the dirham gets undervalued. To keep pace under such conditions, UAE business will be made to pay 30 per cent more to hire skilled expatriate labour in 2008. Meanwhile, the undervalued dirham will cause further inflation in the UAE since exports are priced in dollars while the majority of imports in other currencies.

Evidently, dirham’s value is drained by dollar peg which is proven by the figures provided by the Central Bank. Dirham lost 2-7% in nominal value against other currencies over the first two quarters of 2007. Throughout the year, the decline continued on the background of the dollar fall. The paradox of the situation was that normally the weakening currency reflects a slowing economy, though this was not the case with the UAE economy.

Analysts regarded the decline in the dirham as well as other GCC currencies that are pegged to the USD among the main factors that led to the soaring inflation rates in the region. Eventually the situation caused a great inflation problem. Considering a two-fold decline in the dirham on the background of the continual increase in global prices, the problem harshly affected the status of UAE as a major importer. The surge in imports resulted from an upswing in the UAE economy and sharp growth in Dubai’s re-exports.

Overall, the analysis shows that economic improvements in UAE do not directly depend on the US dollar peg. The correlation with the USD and other global currencies may cause inflationary tendencies, though cannot diminish the economy. To prove this right, the following factors should be taken into account. With the fastest-growing economy in the world, the UAE is ranked second in the Corporation Council for the Arab States of the Gulf. It is rather strong in petroleum and natural gas exports. Much of the income to the domestic economy is retrieved from the service sector. Other vital sector is construction that holds about $350 billion in construction projects. Most of the imports come from manufactured goods, machinery, and transport equipment. 85% of the exports come from natural resources. In the coming years the UAE dirham will remain pegged to the US dollar ass USD is a stable currency and no other currency can really compete with it.