The Currency

Currency Risk

The UAE Dirham is pegged to the US Dollar at a rate of 3.6710 and consequently GBP/AED moves in exactly the same way as GBP/USD (see charts). 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. To understand moves in GBP/AED we must look at GBP/USD:

April 2006 saw the start of an aggressive Dollar sell off as the market started to speculate that the FOMC were approaching a pause in their cycle of monetary tightening. Data releases began to show signs of a slowing economy (in particular the US housing market) and inflationary pressures appeared to be subsiding. Concerns surrounding the US current account deficit also weighed on the Dollar as demand for US assets fell. May/June saw the Dollar recover, however this move proved unsustainable and was completely reversed in July as FED paused interest rates at 5.25% on June 29th resulting in GBP/USD moving from 1.82-1.90. This was further compounded by an unexpected hike in UK interest rates in August. The Bank of England explained that strong, above trend economic growth and inflation at 2.5% prompted the move and highlighted that inflation would stay above the 2% target for some while yet.

Mitigating Currency Risk

With a volatile currency pair like GBP/AED it is incredibly important to understand that currency fluctuations could make a real difference to the affordability of your property purchase. Thus the timing of your currency purchase is of prime importance and you can use instruments such as “market orders” to try and take advantage of any swings in your favour. For example if after consulting with a currency expert you felt the market had the potential to hit 7.25 you could place an order to buy a set amount of currency at that level and when the market reached it the currency would be bought on your behalf automatically. Thus significantly reducing the chance of you missing the opportunity because you were unavailable or simply the market moved to quickly.

If you were risk adverse and would like to take advantage of the current rate of exchange but did not have the required capital to buy the currency straight away, you could use an instrument known as a “forward contract”. A forward contract allows you to fix the exchange rate today for delivery at a date in the future, subject to a 10% deposit. The remaining 90% is then paid when you require delivery of the funds. This rate can be fixed for up to two years in the future and a forward contract has the flexibility so that the maturity date can be brought forward or rolled over to a later date if need be. Thus a forward contract is particularly useful in hedging a currency exposure derived from a new build property purchase. If you are dealing with a large exposure you would look to use a combination of these products in conjunction with an effective timing strategy and we recommend you consult a market professional at HiFX on 0845 370 5256 or e-mail dubaiselect@hifx.co.uk in order to formulate this strategy.