How Strong Is The Dirham, 2022?

With the current global situation and rising inflation, it is important to understand currency strength, especially when planning for the future or making investments. Here we will discuss the strengths of the dirham and the UAE economy in 2022 and its future outlook.

What Makes the Dirham Strong?

There is a difference between an influential currency and a strong currency. A country’s currency strength depends on numerous factors, including the rate of inflation, interest rates, supply and demand, stability, and long-term economic outlook and policies. As a general rule, the US Dollar is used as the fixed base in the foreign exchange market and is the most popular forex trading investment as it makes up around 90% of these, so it is one of the most influential currencies. In 1997, the dirham was pegged at a rate of 3.6725 DH to 1 US dollar, guaranteeing that the UAE remained stable and insulated from fluctuations. Due to its exchange rate stability, the United Arab Emirates dirham has long been considered a stable foreign exchange or forex trading investment option.

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As the UAE’s economy has grown, so has the dirham’s strength. Thanks in part to the UAE’s strategic location between Africa, Asia, and Europe and its multicultural workforce, which makes up around 88% of the population, made up of 200 nationalities, the majority from India and Pakistan.

But most notably thanks to revenue from natural gas and petroleum or “black gold,” which recently has seen peak price increases, leading to growth from $131 billion to $190.5 billion in less than a year.

What is the Future Outlook for Dirham?

As with all other economies today, inflation rates continue to impact the UAE economy. According to trading economics and analysts, UAE inflation is expected to reach 3% by the middle of this year but is predicted to average 2.5% in 2023, which is in line with the inflation rate at the start of 2022. The positive news is that the UAE is not anticipated to feel the inflation hikes as severely as other economies, but price increases will still be felt across the board. As with other oil-rich countries, the UAE stands to better deal with rising prices.

Source: Pixabay

In recent times there has been some pressure for the dirham to no longer be fixed or pegged to the US Dollar. Some fear that delinking from the United States could negatively impact international trade and have the knock-on effect of more significant market fluctuations. Over time this could negatively lead to a depreciation of the DH.

Oil wealth will not last forever, and the UAE continues to focus on diversification of the economy’s wealth in the future. Although tourism has taken a hit over the past few years, this is a massive growth industry, generating $3 billion in revenue for the first half of 2021 alone. The UAE continues to also develop not just as a center for oil trade but also for business, with its tax-free appeal. The dirham’s strength indeed comes from its long-term financial stability, and the UAE remains a growing economy thanks to its continuing diversification and international business trade.