Gulf states unlikely to drop dollar peg, say analysts

Speculation about cutting ties with the US currency came last week but experts say this is unlikely
Gulf states unlikely to drop dollar peg, say analysts
By Elizabeth Broomhall
Fri 13 May 2011 10:26 AM

GCC countries are unlikely to drop the dollar peg any time soon despite rumours that this could happen in the next three years, according to leading financial analysts.

Analysts say this is unlikely, not least because oil, the region’s major commodity, is priced in dollars.

“There is nothing new about these rumours,” said Banque Saudi Fransi’s chief economist John Sfakianakis. “At the moment the dollar has weakened. Whenever the dollar weakens, people go out and say they will de-peg, because a weaker dollar lowers their purchasing power.

“But I keep on saying that they will not do it. The only thing [the GCC countries] export is oil, which is priced in dollars, so it doesn’t make sense for them to de-peg.”

Other reasons this was unlikely, he said, included the need for stability and predictability in the region, to entice current investment.

“The basic argument is: are you going to keep changing your currency policy whenever there is a change in performance of one currency verses another. The answer is no, you don’t do it, because it doesn’t give a good message to investors to be changing from one day to the next.”

Speculation that GCC member states may drop their ties to the US currency by 2014 came last week when a former Saudi Arabia deputy minister for commerce and industry said the GCC aimed to take major steps in this area.

Addressing the Financial Thought Leaders (FTL) summit, Saleh Mohamed Alshuaibi said countries are likely to act once a monetary union is created, if they follow the recommendations of a recent Abu Dhabi report.

Chris Canning, Head Market Analyst at First Rate FX agreed with Sfakianakis, citing similar events in 2007 when rumors of revaluing the dirham peg, which came to nothing, and worked against Dubai’s economy.

“There is always talk of losing the peg when the dollar starts to weaken, that’s what we’re seeing at the moment.

“A more likely thing is that the countries will revalue the peg against a basket of currencies, because I don’t think the nations could support a completely free currency.

“Also, this way they would still get the benefits of having the peg – as they’d still have the stability of the stronger currencies and the reliability of the rates of exchange - but they wouldn’t be completely on their own.

He added: “I’m still very dubious about what will happen long term,” he added. “I think they will just keep the dollar peg.”

In December, the economy minister of the UAE said Gulf countries should discuss whether to shift their currency peg to a basket of international currencies instead of the dollar, to help the region protect its currencies and investments.

Currently, Kuwait is the only country in the region tracking a basket of currencies, having broken ranks with other Gulf states whose currencies are pegged to the dollar, in 2007.

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