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Tue 21 Jul 2009 03:27 PM

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GCC to continue with US currency peg - analyst

Gulf Finance House says US dollar is undisputed reserve currency for GCC nations.

GCC to continue with US currency peg - analyst
DOLLAR PEG: The Middle East region is a big buyer of US dollar-denominated assets. (Getty Images)

GCC economies were likely to continue to peg their currencies to the US dollar despite it being in their interests to diversify their foreign currency reserves away from the greenback, according to an economist with Gulf Finance House.

“The US dollar is the undisputed reserve currency and will remain so for as far as one can see, but the question is is it losing some of its market share to the euro?  

“It’s in the interests of surplus economies to diversify their reserves and portfolios to protect their values,” according to Ala’a Al-Yousuf, chief economist at Gulf Finance House in London.

With five of the six Arab states that comprise the GCC – Saudi Arabia, the UAE, Bahrain, Qatar and Oman – pegging their currencies to the dollar, the region is a big buyer of US dollar-denominated assets.  The sixth, Kuwait, uses a basket heavily weighted in dollars.

During his visit to Saudi Arabia and the UAE last week, US Treasury Secretary Timothy Geithner said he received reassurances from GCC officials that the dollar would remain the region’s main reserve currency despite calls from some quarters to drop the dollar peg.

Geithner stressed the US government’s desire to maintain a strong dollar policy.

Although the dollar has performed well against the euro, its value has slid against the Japanese yen and the Chinese yuan.  

“Moving away from the dollar peg as a policy tool is off the table,” said Rachel Ziemba, an economic analyst at RGE Monitor.  

“They (GCC states) didn’t break when they were under the most pressure last year and in 2007 and because of that policy these countries are going to be limited in their ability to move away from dollar assets.  

“At a time of financial crisis, currency stability is a priority and in that environment they value that stability more than monetary independence and autonomy.”

But Eckart Woertz, an economist at Gulf Research Center, said: “A finance minister cannot talk up the dollar, as at the end of the day it is numbers and the numbers do not look good.

“There are serious structural issues with the US dollar and the current monetary policy of the US and all central banks worldwide in general that will lead, inevitably, to some kind of currency devaluation.”

GCC Secretary-General Abdulrahman Al Attiyah was quoted by the Saudi Press Agency last month as saying that the four Gulf states heading towards a monetary union - Saudi Arabia, Kuwait, Qatar and Bahrain - could review in the future an initial plan to link their joint currency to the US dollar.

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Ivo Cerckel 11 years ago

“The US dollar is the undisputed reserve currency” Money (currency) is a good readily acceptable in exchange by everyone in a given geographical area, and is sought for the purpose of being re-exchanged. And what is that a RESERVE currency? Such a good acceptable in different (all?) geographical areas?