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Barclays Wealth's Kevin Lecocq discusses wealth management challenges in the Middle East.

Kevin Lecocq, CIO of Barclays Wealth, talks to Tamara Walid about where he thinks the weakening dollar is heading, the pros and cons of depegging, and the unique challenges of wealth management in the Middle East.

A lot has changed since 1971 when the strength of the US dollar allowed people like John Connally, Treasury Secretary in those days, to say: "It may be our currency, but it's your problem".

Connally's remark was uttered just as the US broke free from the gold standard, consequently laying down a fresh set of rules for international business.

Kevin Lecocq, chief investment officer and head of the Investment and Product Office at Barclays Wealth, recalls the secretary's comment, as we sit on the 15th floor at the DIFC's The Gate, where the bank's Middle East office is located.

And although times have changed, Lecocq believes, some things remain the same - and as the CIO of a wealth asset management company with over US$217bn in assets, he should know.

As from way back, the US runs its monetary policy exclusively on domestic concerns. One is the inflation rate and the other is the unemployment rate. And it doesn't really take other linked currencies much into account in making its monetary policies," he says.

This isn't very surprising. After all, the GDP of the US is around US$13 trillion, whereas Saudi Arabia's is less than US$570bn, even with oil being at US$100 a barrel.

This means that even a 20% plus or minus in the Saudi riyal has barely any effect on the US so when it comes to countries such as Oman and the UAE, the effect is even more negligible. This US attitude, Lecocq believes, is still present today, to some degree.

"Much of East Asia has defector pegs or, as in the case of Hong Kong and until recently Malaysia, hard pegs to the US dollar.

Of course Latin America has had one and that's depegged and of course the Gulf region with the exception of Kuwait is part-pegged," says Lecocq, continuing: "What has happened is that the US is responding to its own domestic problems and subprime crisis, by cutting rates pretty dramatically, and this is not necessarily optimal monetary policy for the GCC, which is experiencing inflation and extraordinary robust growth.

This calls for a balancing act by the monetary policy authorities in the region, stresses Lecocq. On one hand there's the option to remove the peg and run an independent and domestically-focused monetary policy, he says. On the other hand, there are benefits to the peg in that it eliminates the exchange rate risk.

The benefit of the peg on linked currencies is, among themselves, there's really no exchange rate risk.

Exchange rate risk with the US is zero and so there are benefits with cost and so, in doing that, in our own belief, the benefits partly outweigh the costs in terms of trade and capital, in terms of how the monetary policies are engineered," says Lecocq.

A minute later, however, Lecocq is back in reality, recalling that whatever market-watchers thought, what really mattered was the opinion of decision-makers.

"It doesn't actually matter what we think, but what we think policy people think," says Lecocq, who doesn't see any signs of a move from Gulf countries to depeg from the dollar, even after talks in Qatar last November.

Despite being a very difficult shift to predict, Lecocq's experience tells him that the dollar will start to rally this year.

"In fact the euro has run out of steam and the pound is starting to sink a bit.

The current account in the United States is starting to shrink and the bad news is that the US and its cycle is the first one to slow down. Europe will start to slow down a bit later, and perhaps other parts of the world later on, but there's a cyclical element to it.

The dollar's probably pretty close to bottoming out and if the euro sells off into the 1.30s or 1.20s then there'll be even less pressure on countries in the GCC," predicts Lecocq.

The issue of inflation remains, and Lecocq believes that, if nothing else changes policy-makers' minds, inflation will. His gut feeling, tells him, however, "they're not ready to make the move yet". Hypothetically, if Gulf nations were to depeg tomorrow, Lecocq cites a number of advantages, but believes it is not entirely clear whether the man on the street would be better off.

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