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Gulf States May End Dollar Peg - Say Goodbye to the short-lived USD Rally

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May 01, 2008 – Comments (3)

As much as I would have loved for this little bump in the USDX from around 71 to near 73 to have marked a real reversal in the USD, the reality is unfortunately quite otherwise.  This was a headfake, and nothing more.  If the gulf states do what they are suggesting here, the dollar will accelerate its slide.

Gulf States May End Dollar Pegs, Kuwait Minister Says (Update3)

By Fiona MacDonald and Matthew Brown

May 1 (Bloomberg) -- Gulf states are considering dropping their pegs to the dollar after the U.S. currency's decline stoked inflation across the region, Kuwaiti Finance Minister Mustafa al- Shimali said.

``Yes, there are some'' Gulf Cooperation Council states considering dropping their pegs to the dollar, which has fallen 13 percent against the euro in the last 12 months, al-Shimali said in an interview in Kuwait late yesterday. ``Some countries will do what we are doing.''

Al-Shimali didn't say which countries might end their pegs. Speculation of a change in Middle East currency systems eased this month after the United Arab Emirates and Qatar ruled out a revaluation or dropping the dollar peg. Inflation is running close to 10 percent in Saudi Arabia and the U.A.E., while Qatar's consumer prices rose 14 percent in the fourth quarter.

The Kuwaiti dinar has appreciated 7.9 percent against the dollar since the nation dropped its peg to the U.S. currency in May last year. The link to the dollar meant that imports in euros and other currencies that have strengthened against the dollar became more expensive.

Gulf states have been struggling for the past year with whether to end their dollar pegs.

Newspaper reports

``This news has already been in newspapers,'' al-Shimali told reporters at a meeting of the Fourth World Economic Forum in Kuwait today.

Reuters reported today that al-Shimali said he was citing newspaper reports and not expressing his own opinion when commenting to Bloomberg on the future of the Gulf dollar pegs.

When asked at the forum about Gulf states considering dropping their pegs, al-Shimali told reporters that he would not comment on behalf of Gulf states.

Officials at the Qatari, Omani and U.A.E. central banks were not immediately available. The Bahraini and Saudi central banks were closed today.

``Inflation is rising in the Gulf to a great extent because of loose monetary policy,'' said Marios Maratheftis, head of research for Standard Chartered Plc in the Middle East in a telephone interview from Dubai. ``Tightening monetary policy can only happen if they drop their currency pegs or strengthen the currency, preferably both.''

Rate Cuts

The U.A.E. and Qatar lowered their benchmark interest rates today by a quarter point, matching a cut by the U.S. Federal Reserve a day earlier. The move is needed to maintain the dollar pegs.

``The case for currency reform is strong,'' Simon Williams, chief Middle East economist at HSBC Holdings Plc, said in a telephone interview from Dubai. ``The inflationary pressures the Gulf faces not only demand a stronger currency, they also require an independent monetary policy. The issue is not going to go away, but I don't believe that change is close.''

The idea of dropping the peg ``has been started by other Gulf countries and they are partially going this way because the dollar has been going down for some time,'' al-Shimali said.

To contact the reporter on this story: Fiona MacDonald in Kuwait fmacdonald4@bloomberg.net; Matthew Brown in Dubai at mbrown42@bloomberg.net
Last Updated: May 1, 2008 08:02 EDT

http://www.bloomberg.com/apps/news?p...&refer=mideast

3 Comments – Post Your Own

#1) On May 01, 2008 at 1:31 PM, Tastylunch (29.29) wrote:

oh great. Thanks Kuwait, we only saved you from total annihilation back in the early 90's....

I guess I better go load up on Francs and Gold before th $hit hits the fan...

 

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#2) On May 01, 2008 at 1:41 PM, leohaas (31.56) wrote:

Not so sure that this does the gulf states any good. OK, their imports from Europe have become more expensive. But if they drop the peg to the dollar, their oil export expressed in their own currency will drop as well in value. The international oil markets don't care about the value of some local currencies: it still uses US$...

This will only have any impact if the majority of oil traders decide to drop the dollar for some other currency. 

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#3) On May 01, 2008 at 1:43 PM, Broken196 (< 20) wrote:

We should have never got involved with the middle east conflicts.

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