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Gulf Arabs increasingly expected to ditch dollar
Via NY Transfer News Collective * All the News that Doesn't Fit
Financial Times - Nov 15, 2007
http://www.ft.com/cms/s/0/14499d74-93b0-11dc-acd0-0000779fd2ac.html
Gulf Arabs increasingly expected to ditch dollar pegs
By Peter Garnham
Speculation heightened on Thursday that Gulf Arab states were
preparing to ditch their currencies' pegs against the dollar as the
United Arab Emirates expressed concerns over the policy for the
second time this week.
Sultan Nasser al-Suwaidi, governor of the UAE central bank, said
on Tuesday that the dollar's slide had pushed the country to a
"crossroads" over the UAE dirham's peg.
On Thursday, Mr al-Suwaidi followed up those comments, saying there
were strong social and economic pressures to drop the dollar peg,
suggesting the UAE could move to track a basket of currencies
instead, which would predominantly, but not entirely, consist of
dollars.
The statement sent the dirham, which has been fixed at Dh3.6725
against the dollar since 1997, sharply higher in the forward currency
market, with one-year forward rates predicting a 2.7 per cent
appreciation in the currency.
Kuwait switched from a dollar peg to a currency basket in May, but
other members of the Gulf Co-operation Council -- Saudi Arabia, the
UAE, Oman, Bahrain, and Qatar -- have held steadfastly to their
dollar pegs, in spite of the US currency slumping to record lows.
The UAE said it would drop its dollar peg only in concert with other
GCC members. Saudi Arabia, the GCC's most influential member, has
so far showed strong determination to fight speculation that it
would revalue the Saudi riyal, intervening aggressively last week
in the forward foreign exchange market to defend the riyal's peg.
However, analysts say the UAE's comments could undermine the
credibility of any verbal or market intervention from Saudi Arabia.
The problem for the Gulf states is that, as the Federal Reserve
cuts US interest rates, a weakening dollar adds to inflationary
pressures in the region.
Gerard Lyons, head of global research at Standard Chartered, says
problems develop when there is a disconnect between the policies
needed in one region and those needed elsewhere. This is something
the UK found to its cost when it was tied to the Deutsche mark in
Europe's exchange rate mechanism in the early nineties -- something
which eventually forced the UK out of the ERM.
"A similar episode, albeit different in scale, is now being seen
in the Gulf," says Dr Lyons. "While the US is cutting interest rates
in response to a slowing economy, the Gulf needs a tighter monetary
policy to curb inflation."
Hedge funds could benefit from any appreciation in Gulf currencies
as, according to dealers in London, they started building up bets
on a revaluation by the Gulf states as soon as the problems in the
US mortgage market became evident in July.
However, Hans Redeker of BNP Paribas, says the prospect of an
appreciation in GCC currencies is no longer just a trade for expert
hedge funds. "This has become a widespread trade that family offices,
private banks, and most proprietary desks have on," he says.
Russell Jones of RBC Capital says it is in the interest of the
region's rulers to act to quell inflation. Rising inflation could
prompt civil unrest from the region's predominantly young population,
he says. "The longer they delay abandoning their pegs, the more
painful it will be."
However, there is a wider context to the debate, given the strains
being felt in Europe from the strong euro and a widespread feeling
that some Asian currencies, including Chinabs renminbi, need to
strengthen further.
Mervyn King, governor of the Bank of England, said this week that
countries, such as China, that link their currencies to the dollar
were causing increasing tensions and the matter needed to be addressed
at this weekend's G20 meeting of finance ministers and central banks
in Cape Town.
When asked about GCC currency pegs, Mr King said he was concerned
that states such as Saudi Arabia and the UAE might de-peg their
currencies, indicating that he would prefer Asian currency appreciation
to an early de-pegging from the GCC.
Mr Redeker says: "Western central banks fear that a GCC de-peg will
increase commercial and financial demand for floating non-dollar
currencies, such as the euro and sterling, which in current market
conditions would send them sharply higher."
*
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