1 Dirham – United Arab Emirates

In 2005, the currency situation in the United Arab Emirates was defined by its long-standing and firm peg of the UAE dirham (AED) to the United States dollar (USD). Established in the late 1970s, this fixed exchange rate was set at approximately AED 3.6725 per USD 1. This policy provided crucial stability for the UAE's oil-dependent economy, as global oil prices were (and still are) denominated in dollars, insulating government revenues from exchange rate volatility and fostering a predictable environment for trade and foreign investment, which was vital for the nation's rapid diversification and construction boom.

The dollar peg, however, also meant the UAE imported the monetary policy of the US Federal Reserve. Throughout 2005, as the Fed continued a cycle of raising interest rates to combat inflation, the UAE Central Bank was compelled to follow suit to maintain the peg's credibility. This created a domestic policy tension: while necessary for the currency anchor, higher interest rates increased borrowing costs, potentially cooling the overheated real estate and construction sectors. Furthermore, a weakening US dollar against other major currencies during this period meant the dirham also depreciated in relative terms, contributing to imported inflation and raising the cost of living, particularly for expatriates sending remittances to non-dollar countries.

Despite these pressures, 2005 was a year of unwavering commitment to the peg from UAE authorities, viewed as a cornerstone of economic stability. The debate about its long-term suitability, however, was gaining academic and financial market attention. With the impending launch of the Gulf Cooperation Council (GCC) single currency, initially planned for 2010, there was speculative discussion about whether the UAE might eventually re-peg to a currency basket. Nevertheless, for 2005, the monetary landscape was one of stability under the dollar peg, even as the economic costs of that policy became more apparent amidst the nation's extraordinary growth.