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Reasons Behind the Rise and Fall of the UAE Dirham Against the Egyptian Pound

The exchange rate of the UAE dirham against the Egyptian pound moves in waves of appreciation and depreciation, shaped by the contrast between the dirham’s stability and the pound’s volatility. Because the dirham is pegged to the US dollar, its trading band is narrow, whereas the pound is pressured by inflation, hard-currency shortages, and changes in Egypt’s exchange-rate policy. Consequently, the rate shifts between the official and parallel markets according to the supply of foreign currency and market confidence.

The dirham’s stability rests on the UAE Central Bank’s dollar-peg policy: automatic interventions to buy or sell the currency whenever needed. Globally, the dirham therefore tracks movements in the US dollar and US interest rates, while the pound must respond to domestic factors such as local inflation, the cost of financing the trade deficit, and the volume of essential imports. When pressure mounts, Egyptian authorities ease foreign-exchange controls or allow pound adjustments, triggering sudden jumps in the dirham’s value inside Egypt.

Bilateral trade links create two-way flows of the two currencies. Egypt exports gold bullion, electronic display screens, foodstuffs, and textiles to the UAE, while importing re-exported petroleum products, electrical equipment, building materials, and transport services tied to Dubai and Abu Dhabi’s re-export hubs. This trade keeps demand for dirhams high among Egyptian importers and, in turn, generates pound balances for Emirati firms operating in Egypt.

Financial ties go beyond merchandise trade. Large UAE investments pour into Egyptian real estate, ports, energy projects, and tourist zones. Multi-billion-dollar deals have brought hard currency directly to Egypt’s central bank and bolstered reserves, supporting the pound and temporarily slowing the dirham’s rise. Yet expectations of further investment—or of delays—remain a speculative factor in the parallel market.

Alongside investment, the UAE places sovereign deposits at Egypt’s central bank and activates currency-swap lines between the two central banks. These tools provide instant foreign-currency liquidity and calm markets when needed, but they also create future obligations that Egyptian authorities must consider in managing the pound.

The single most powerful driver of retail demand for dirhams is the remittances of hundreds of thousands of Egyptians working in the UAE. These transfers supply a steady source of foreign exchange and ease current-account pressure, but they also lead the workers’ families to seek dirhams locally for expenses or hard-currency savings. Dirham liquidity in the informal market therefore swells—especially during holidays and vacation seasons.

Periodic limits on foreign-currency cash withdrawals and deposits encourage a parallel market in which traders and importers rely on dirhams to finance imports or settle obligations in Gulf free zones. A price gap emerges between the official rate and the “street” rate. The wider that gap, the more attractive the dirham becomes as a hedge; the narrower it is, the more the pound recoups some of its losses.

Global oil-price cycles and US interest-rate policy alter the UAE’s oil revenue and the worldwide cost of dollar borrowing, indirectly affecting dirham liquidity and Gulf investors’ appetite for Egyptian assets. At the same time, Egypt’s dependence on imported energy and grains—whose prices swing on international markets—translates those cost changes into varying pressure on the pound-dirham rate.

Tourism and air-travel services deepen monetary interdependence: Emiratis visit Egypt’s beach and heritage destinations, while the UAE’s retail and leisure sector attracts large numbers of Egyptian residents and visitors. The resulting small but frequent dirham transfers for travel and shopping help keep the currency familiar in Egyptian banks and exchange houses.

In short, the dirham–pound trajectory is set at the crossroads of divergent monetary policies, asymmetric trade and investment flows, hefty worker remittances, and market expectations about Egypt’s economic stability and the UAE’s willingness to keep supporting its strategic ally. In times of uncertainty, the dirham thus remains a preferred haven for many Egyptians, while the pound’s strength hinges on Cairo’s capacity to attract hard currency and manage the exchange market with greater flexibility.

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