Sunday, January 14, 2007

Falling dollars

US dollar/Euro ratio

Many Arab Gulf States peg -- in one way or another -- their currencies to the US dollar. But with the value of the dollar sliding seriously of late and making imports more expensive, the current peg policy is now under review, especially in light of the Gulf Co-operation Council (GCC) expressed desire in working toward "monetary union."
ABU DHABI -- Gulf Arab oil producers are reviewing currency pegs to the falling U.S. dollar and could decide as early as March whether to keep or change their exchange rate regime, the United Arab Emirates central bank said yesterday.

Governors of the six Gulf central banks will meet in March in Saudi Arabia and may agree to switch to another currency or currency basket, said UAE central bank governor Sultan Nasser al-Suweidi. They may decide to leave the pegs as they are and any changes would have to be approved by Gulf Arab rulers, he said.

It was the first acknowledgment the Gulf might not stand by a currency regime designed to prepare for monetary union in 2010, although markets began speculating about a revaluation last year as the U.S. dollar fell about 10 per cent against the euro.
While Oman remained intransigent about its peg policy, more recently and contravening the GCC consideration, Bahrain has said that it, too, will not change it peg policy, which will leave the dinar tied to the US dollar.

One always needs to wrap the consideration of such announcements, which appear to be more about controlling speculative runs on the dollar than about what the actual policy might turn out to be, with the need to maintain valuation of dollar denominated assets. We saw this just a couple of months ago when China announced that it would diversify its "international investment" policy, an announcement widely viewed as an indication that China would move away from the US dollar. The US dollar took an immediate plunge, after which the Chinese had to then calm the currency waters by saying that only "future" investment would be affected by diversification and not all those hundreds of billions of USD already owned by the Chinese central bank.

Despite the appearance of doubt about the currency peg policy withing the GCC, one thing that will ensure its reconsideration and possible adoption of the euro or other currencies will be a continued slide of the US dollar on currency markets. And with many important players moving away from the dollar (China, Russia, various OPEC countires), there is nothing on the horizon that will halt this trend other than owners of US debt exerting themselves to keep it propped up. Today, those efforts appear to be on the decline as well. This is a future scenario in which nothing said today by Bahrain or Oman will have the slightest weight at all.


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