Gulf currencies may drop dollar peg

Kuwait’s decision to stop pegging its currency to the dollar last year hasn’t completely tamed inflation, but experts say many of its oil-rich neighbors will follow, desperate to fight inflation.

Oil is priced in dollars on the world market, but many Gulf countries rely on government-subsidized imports priced in euros and other currencies that have been rising against the greenback. This relationship has pushed up the price of imports, a dilemma that could get worse as fears of a recession in the U.S. and related interest rate cuts continue to push down the dollar. Raising their interest rates would have little effect on the Gulf states’ inflation rates while their currencies remain pegged to the dollar.


“Inflation is likely to stay on an increasing trend in the short term,” said a Merrill Lynch report on Gulf nations published in January. With few other fiscal policies available to control inflation, the region’s governments would consider de-pegging or revaluating their currencies, the report speculated.

Alan Greenspan, former chairman of the U.S. Federal Reserve, said at an economic forum in Saudi Arabia last month that de-pegging from the dollar would significantly help Gulf states battle rising inflation in the short term.

AP