Highly unlikely, is the sensible answer.
The UAE dirham, which has been pegged to the US dollar at a rate of 3.6725 since 1997, has the full faith and wallet of the state of Abu Dhabi behind it.
With Abu Dhabi estimated to have billions of dollars of foreign currency reserves, and around 9 per cent of the world’s proven oil reserves, the emirate looks the last sovereign entity likely to be forced into an embarrassing devaluation.
But the market appears to disagree. United Arab Emirates’ one year currency forwards, which can be used by traders to take bets on the future direction of currencies, hit their highest level since February on Monday.
One-year dirham forwards rose as high as 161 points from a Friday close of 85 points, implying a near 0.42 per cent devaluation of the currency over a one-year period, according to Reuters. The rate later eased back to a quote of 40/70.
While forwards prices are usually dictated by interest rate differentials (as noted in comments below), because of the sharp movement in the forward rate it is reasonable in this case to assume that traders were reacting to events in the region.
More importantly, UAE interbank lending rates, measured by the Emirates interbank offered rate (EIBOR), rose only slightly at the Monday fix after the Central Bank of UAE launched a liquidity facility available to banks across the region.
This helped to assuage concerns over the local banking system and its exposure to bad debts and capital flight.
As Willem Buiter argues on his Maverecon blog, the turmoil in the Gulf is more important as a warning to other nations over their mounting debts, rather than a systemic risk in itself.
A classic emerging market crisis needs a devaluation like an Elizabethan court needs a jester. Those looking for one in the Emirates are likely to be left disappointed.
Related links:
One emirate for all, none for one - FT Alphaville
CSI Dubai - FT Alphaville
“For the general purposes of the Dubai Financial Support Fund…” – FT Alphaville
“The Sun Never Sets on Dubai World.” Really? – FT Alphaville
Dubai World asks for debt ‘standstill’ – FT