Gulf must ditch dollar peg - Abu Dhabi gov't

DITCH PEG: The DPE has urged Gulf states to sever their currencies link to the dollar in the face of soaring oil prices and the plummeting value of the US currency. (Getty Images)

Member of the Gulf Cooperation Council (GCC) must ditch their currency pegs to the dollar in the face of soaring oil prices and the plummeting value of the US currency, the Abu Dhabi Department of Planning and Economy (DPE) said on Saturday.

The department said in its weekly report that even though the peg has served Gulf states well in the past, it was time to sever the link and move to a basket of currencies in the face of runaway inflation.

"Today, the dollar is falling relentlessly and oil prices are skyrocketing. This new reality calls for a rethink of monetary policies, GCC states need to peg against a basket of world currencies, taking into account the latest trading patterns which tend to be bent towards the euro zone and Asia," the report said.

Gulf states' dollar pegs have been blamed for both pushing up inflation and restricting central banks ability to fight it.

The dollar peg forces central banks to track US monetary policy to maintain the relative attractiveness of their currencies.

The US Federal Reserve has been slashing interest rates since September to stave off recession at a time when Gulf states should be hiking rates to rein in inflation.

The falling value of the dollar also drives up the cost of goods from non-dollar pegged economies - particularly Europe and Asia - adding to inflationary pressure.

All Gulf states, bar Kuwait, peg their currencies to the dollar, which was agreed in preparation for the upcoming GCC monetary union and single currency.

Kuwait ditched its dollar peg in May last year, citing the rising cost of imports, but other central banks have so far refused to follow suit.

UAE Central Bank Governor Sultan Nasser Al-Suweidi has repeatedly ruled out any shift in monetary policy, and last month said inflation in the UAE was stabilising and likely US interest rate hikes would lift the ailing greenback.

Inflation in the UAE hit 11.1 percent in 2007, its highest level in at least 20 years.

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READERS' COMMENTS

freely floating currencies with freely floating reserves
Posted by Ivo Cerckel, Siquijor, Philippines on Sunday 6 July 2008 at 05:04 UAE time


Why should this be a game of de-pegging and re-pegging against a basket of world currencies, taking into account the latest trading patterns which tend to be bent towards the euro zone and Asia?

Why not de-peg and let the Gulf currencies freely float with the oil and gold reserves also freely floating in the background?

The dollar-regime is inflating the price of oil-wealth to such an extent that price inflation in third-world countries is three times as high as in the west.

Oil-speculators are not interested in the possession of oil as wealth, but only in concluding wagers over the oil price in order to tap its monetary surplus value.

Hence, untapped oil reserves have the same wealth-consolidating function as gold.

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