Pressure mounts to drop dollar peg

DUBAI -The relentless decline of dollar over the past few months and Federal Reserve’s interest rate cuts will force Gulf countries to revalue their currencies within months to stem spiralling inflation, currency analysts and experts said.

Speculation about a Gulf-wide revaluation is rising before a meeting between Saudi Arabia’s advisory council, the Shura, and the finance ministry and central bank on February 17, according to Steve Barrow, currency strategist at Bear Stearns Co.


“It’s going to be very difficult for central banks in the region to have adequate control of monetary policy, and hence inflation, when the Fed is slashing rates left, right and centre and the dollar is slumping,” Barrow was quoted yesterday by Bloomberg. Inflation in the GCC has reached record high with Qatar reporting a record 14 per cent surge in Consumer Price Index, followed by the UAE, Kuwait and other countries. The regional average was 6.3 per cent in 2007, compared with 0.3 per cent in 2001, according to Merrill Lynch & Co.

Gulf-based analysts point out that most of the currencies of the GCC are undervalued against the dollar, based on their current-account balances, inflation and costs of goods and services. The UAE dirham was undervalued by 10-15 per cent and the Saudi riyal by 25-30 per cent, according to a report by Deutsche Bank AG.

“The dollar peg prevents nominal appreciation. Since the dollar itself has been falling, the result is rising domestic inflation. Some Gulf economies now have inflation rates of around 10 per cent,” analysts said. Markets piled pressure on Gulf currencies last year as speculation mounted that more GCC countries would follow Kuwait and abandon links to the weak dollar partly to curb imported inflation.

Khaleej Times