Playbooks / Cross-asset
Currency risk and the dirham peg
The rule
Currency is the risk that expatriate investors carry by default and almost never size, because it does not feel like a position. It feels like the ground.
The peg, and what it actually does
The UAE dirham has been fixed against the US dollar at 3.6725 for many years. It is a hard peg, backed by reserves and by policy, and it has held through several cycles.
What it does for you is remove volatility between your dirham assets and the dollar. What it does not do is remove exposure. It converts your dirham holdings into dollar holdings with a fixed conversion rate. That is a simplification of your currency position, not a diversification of it.
Where this bites
The cleanest way to hold non-dollar property exposure is a market whose currency is managed rather than pegged, which is most of the real case for Singapore over Dubai and almost none of the case usually made for it.
Consider a typical Gulf-based professional. Salary in dirhams. An apartment in Dubai, valued and let in dirhams. Savings in a global equity fund priced in dollars. Retirement expected in the UK, or India, or somewhere the currency is neither dirham nor dollar.
That person believes they hold three things. They hold one currency and a plan to spend a different one. If the dollar weakens materially against their eventual spending currency over the decades between now and then, everything they own falls in purchasing power at once, and no line in their portfolio will show a loss.
The correct frame
Currency risk is a matching problem, not an investment problem. The question is not which currency will be strong. It is which currency you will spend, and how much of your assets are denominated in it.
If you intend to retire in the UK, sterling assets are not a speculation, they are a liability match. If your children will study in the United States, dollar assets are the match. If you will stay in the Gulf permanently, the peg is doing exactly what you want and there is very little to do.
The mistake is not holding the wrong currency. It is never having asked the question and discovering the answer at sixty.
Sizing it without over-engineering
Three practical steps, in order.
Name the spending currency. For most people it is not one currency but a weighting: some here, some there, some undecided. Write down the weighting rather than a single answer.
Look at what you actually hold. Dirham property and a dollar pegged salary are one exposure. A global equity fund is more diversified than it looks in underlying assets but it is still priced in whatever currency you bought it in, and for the long run the underlying assets matter more than the pricing currency.
Close the largest gap first, gradually. This is a decades-long mismatch and it does not need to be fixed this quarter. It needs to stop widening.
The tail risk nobody wants to discuss
A peg is a policy choice, not a law of nature. Pegs have held for decades and pegs have broken. The probability is low and the consequence would be large, which is the definition of a risk worth holding a modest hedge against rather than a risk worth betting on. Anyone who tells you it cannot happen is describing a preference, not an analysis.
The arithmetic
Where it breaks
- It treats currency as a return question. Over long horizons currency is closer to a zero sum wash between developed economies, and the reason to hold a currency is that you will spend it, not that you expect it to rise.
- Hedged share classes solve a different problem. They remove short term volatility at a cost, and for a multi-decade horizon the cost frequently exceeds the benefit.
- It ignores that a global equity fund's underlying earnings are already spread across currencies regardless of the fund's own pricing currency, which makes the exposure smaller than it looks.
- Property cannot be rebalanced. Currency mismatch in an illiquid asset is a decision taken once, at purchase, and expensive to reverse.
- The peg has held for a long time, which is evidence but not a guarantee, and treating a long record as certainty is the same error made about every stable regime before it was not.
- Local mortgage debt in dirhams against a dirham asset is matched and should not be counted as an exposure. Debt in a currency you do not earn is the dangerous version.
When to use it
Once, properly, when you have both a portfolio and a rough idea where you will end up. Then at any point that answer changes, which for most expatriates is more often than they expect.
The Safe Withdrawal Rate does this arithmetic for you, in your currency, in about thirty seconds.
Open the calculatorSources
- Central Bank of the UAE
- Bank for International Settlements, effective exchange rate statistics
- International Monetary Fund, exchange rate arrangements
Last reviewed . Educational research, not personal advice. Disclosure standards.