The dollar peg under strain during the Dubai debt crisis

The UAE dirham has been held fixed at 3.6725 per US dollar since 1997, a peg the Central Bank of the UAE defends by buying and selling dollars without limit, financed by hydrocarbon export revenue that is itself dollar-denominated. That arrangement was tested severely in 2008 and 2009: a reversal of speculative capital flows that had bet on a dirham revaluation produced a financial-account deficit of around 55 billion dollars in 2008, and central bank reserves fell to about 31 billion dollars by year-end. The strain culminated in Dubai, where state-linked conglomerate Dubai World announced in late November 2009 that it would seek a six-month standstill on roughly 26 billion dollars of debt. The federal response came jointly: a 20 billion dollar support package, split evenly between the Central Bank of the UAE and the government of Abu Dhabi, financed the newly created Dubai Financial Support Fund and underwrote Dubai's government-related entities through the restructuring. The episode showed that defending the peg's credibility during a crisis required federal and inter-emirate fiscal backstops, since the central bank's conventional monetary tools were constrained by the fixed exchange rate itself.