Tuesday, July 08, 2008

GCC To Depeg From USD

United Arab Emirates is lobbying neighboring countries to depeg their currencies from the U.S. dollar to curb inflation.

UAE is calling on all six Gulf Cooperation Council member states to "rethink" their monetary policy amid soaring inflation in the oil-rich region. The GCC members are Saudi Arabia, Qatar, Kuwait, the United Arab Emirates, Bahrain and Oman. All of their currencies are pegged to the dollar except Kuwait, which depegged its currency, the dinar, from the dollar in May 2007 in favor of a basket of currencies.

  • Below are some related commentary and opinions on GCC to depeg:

  • Economist: Argues GCC should depeg or revalue vs USD but politics forms a high barrier to change. US applied political pressure against UAE de-peg earlier this year, but political winds may be shifting
  • ABDPE: Although official statements from the UAE have ruled out a unilateral depeg or reval from the flagging dollar, a government study suggests GCC states should move to a trade-weighted basket of global currencies to fight inflation
  • BNY: Despite the best efforts of Saudi Arabia (and the US) to support the USD peg, the pressures for change have not gone away and would certainly increase should the USD start to slide again
  • Merrill Lynch: Latest US Treasury report gave tacit approval of revaluation of GCC currencies to alleviate region's inflationary pressures. UAE, Qatar will probably move to currency basket in next few months, with their currencies appreciating 5% by yearend
  • HC: UAE wants to avoid losses on USD-denominated FX reserves
  • Jadwa: Revaluation of the riyal would not tackle the underlying causes of inflation but a significant revaluation (15% or more) would have a clear and immediate impact on inflation and would provide some breathing space while supply bottlenecks gradually unwind
  • MS: Small step revaluations remain a risk particularly for the smaller open economies within the GCC - UAE, Qatar
  • JPMorgan: Saudi Arabia, UAE unlikely to de-peg in 2008. Most inflation not 'imported'. Revaluation may invite further speculation rather than quell it
  • UBS: Bahrain, Oman and Saudi Arabia unlikely to change currency regime as they face less structural or cyclical need to do so
  • Khan: Large revaluation risks loss of non-oil competitiveness; modest revaluations (2-3%) and adoption of individual currency baskets more likely
  • May 2007: Kuwait switched to basket peg (70% USD); revalued 4th time on Oct 16 to stem accelerating inflation
  • NBER: Fixed exchange rate regime becomes unsustainable due to unexpected increase in government spending
photos: Sawika Chaidechpinki

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