Expats in UAE suffer as dollar tumbles

Currency is a zero-sum game - when one wins, another loses. The problem for the majority of local workers is that they have been on a lengthy losing streak.
The so-called currency wars of recent weeks have hit many expatriate workers where it hurts the most - in their pockets. Simply put, the US dollar's continued weakness means that dirhams earned in the UAE are worth less in the home currency of most workers sending money overseas.
For Marios Michael, a pilot who moved to Dubai from Cyprus six years ago, the fluctuations of late have meant a difference of as much as €1,000 (Dh5,112) in his monthly remittances back home.
"That is a considerable amount of money for anyone," he says. "It makes you stop and think about how luxurious one can live."
Now 54, Mr Michael says he has even postponed plans to retire next year because of the uncertainty surrounding how far his income will stretch.
Like most expatriates, he does not enjoy the flexibility of waiting to send money home until exchange rates improve, nor does he claim the expertise to predict whether they will get better in the near future. He follows the chatter about the ascendency of the Chinese yuan and the depreciations of the US dollar, but it leaves him more confused.
"There is a very big battle going on, but what worries me is how manufactured this is and how it is going to affect me in the future," he says. "Do I put all of my savings in yuan? What do I do? I do not know."
This dilemma is an unavoidable fact of expatriate life, given that a core motivation for most workers in the UAE is to send money back home, whether it is earmarked for family members or for a comfortable retirement sometime in the not-so-distant future.
But the tension is especially acute because the currency fluctuations of the past few months have been among the most extreme in recent memory.
This week, the Australian dollar reached parity with the US greenback for the first time in almost 28 years, the culmination of a run in which the Aussie dollar has gained almost one third in the past 18 months. The euro, Canadian dollar and South African rand are also climbing steadily, with the rand up 37 per cent since the start of last year. Overall, the dollar is near a nine-month low against a basket of global currencies.
The weakness has caused some OPEC members to suggest that an oil price of $100 per barrel would help to strengthen the flagging greenback.
"This volatility puts a large amount of stress in the minds of people who work here," says Sudhir Shetty, the chief operating officer of UAEXchange, a currency exchange and remittance company.
Mr Shetty says as much as 85 per cent of remittances through his company go to South Asia, where currencies have suffered badly against the dollar in recent months.
Making matters worse, experts say there is little that the average consumer can do, outside of hedging with rather sophisticated futures contracts or accumulating a basket of various currencies to provide diversification (see the facts). As a general rule, currency exchange houses offer better rates than retail banks, so shopping around can provide benefits, but anticipating the daily gyrations is virtually impossible.
The reason is simply that the forces yanking currencies up and down in value are vast and complicated. Historically, the US dollar was considered the benchmark because of its relative stability. When other currencies weakened, it was usually because their economies encountered significant turbulence. What has been happening in the past couple of years - since the Lehman Brothers collapse in September 2008, anyway - is that global markets are reacting to the relative instability of the US economy.
Other factors include the rapid growth of many emerging market economies, which are attracting sizable foreign investments despite the inherent risks.
"As markets get risk-averse, the dollar goes up and then vice versa when that hysteria subsides," says Mark McFarland, the emerging markets economist with Emirates NBD in Dubai.
Finally, there is the ongoing row between the US and China, in which the American government is pushing the Chinese to devalue the yuan to make US exports more competitive. As a general rule, when a country's currency is weaker, the goods it exports become cheaper and thus it enjoys a trade advantage. The American complaint with China - that its cheap currency gives it an unfair edge in global trade - is the same one that other countries are increasingly making at the US.
"No country would want its currency to strengthen beyond certain boundaries. It has its own drawbacks. There has to be a balance," Mr Shetty says.
Mr Shetty, whose company was founded 30 years ago today, says the current frustration among UAEworkers is natural, but he notes that the dirham's peg to the US dollar has paid dividends in previous years.
"The sentiment is still behind dollars. For the common man, he will be more comfortable keeping a $100 bill in his pocket than the same amount in any other currency," he says.
Don't tell that to Sang-wook Lee, 30, of Abu Dhabi. The South Korean engineer, who has lived in the UAE for four years, sent more than $15,000 to his home bank this week to shift the money out of the dollar-based dirham and into his national currency, the won. Mr Lee says he does not see the dollar's weakness continuing much into 2011, but neither does he see a reversal anytime soon.
"For the meantime I want to keep my money in my country and not the US dollar," he says.
The dirham's peg to the US dollar dates to 1997, and it is considered protection against rampant inflation or deflation. But for much of the 20th century, all major global economies were firmly pegged to the dollar. That system was abandoned by almost all major economies in the past few decades in favour of allowing their currencies to float to some degree. The UAE pondered abandoning the peg in 2007, as Kuwait did, in favour of tying the dirham to a basket of currencies.
That sort of change is now considered unlikely. As Mr McFarland points out, tying the Kuwaiti dinar to a basket of currencies did not prevent steep inflation in the run-up to the financial crisis, nor did it provide much protection from the effects of the downturn. Similarly, the euro was once considered a potential rival to the dollar, but the crisis in the eurozone this year revealed that it comes with some of its own systemic weakness.
"It is unclear whether there is anything out there better than what we have," Mr McFarland says.
Indeed, most experts say UAE expatriates have little choice but to ride out the current volatility, although Emirates NBD is recommending to its private banking clients who have significant exposure to a single currency to buy other currencies.
"When the policy isn't clear, it makes sense to hold a mixture of currencies in your portfolio," Mr McFarland says.
Those without that option just have to hope the dollar begins to flex its muscles again soon.
"It is a big chunk of money," says Stephen Jones, a British engineer who was sending dirhams earned in Abu Dhabi to his two children in the UK this week. Mr Jones says the pound's recent strength - it has gained more than 15 per cent against the dollar in the past five months as part of a steady climb - means he is sending £120 (Dh701) less back home each month.
Mr Jones is not optimistic about the short-term future either. His ex-wife is coming to Abu Dhabi for the Formula One race next month, and they agreed that he should delay sending money back to her for the time being. "I've got a good relationship with my ex-wife and she said just hold on to it" until the Formula One race, he says. "It saves me on the sending charge as well."
breagan@thenational.ae