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Fri 13 Nov 2009 01:42 PM

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Qatar sees need to discuss dollar pegs more

Issue has gained momentum after dollar's slide to 15-month lows, oil price recovery.

Gulf Arab oil producers should be more willing to discuss the viability of linking their currencies to the weakening US dollar, an adviser to Qatar's ruler said.

The issue has gained momentum after the dollar's slide to 15-month lows and a recovery oil price recovery that is helping economies in the world's top oil exporting region emerge from a downturn.

"I think they should be more prepared to talk about their currency pricing because what we are having now is the dollar sliding and it is having an impact on the price of currencies linked to it," Ibrahim al-Ibrahim told Reuters in an interview.

Qatar, one of the world's largest investors through its sovereign wealth fund, is part of a planned monetary union with three fellow Gulf Arab countries, of which three peg their currencies to the dollar.

In June, Ibrahim said Qatar, the world's top natural gas exporter, should reconsider linking its currency to the U.S. dollar and diversify its investments away from the weakening greenback.

He called for dropping the peg already last year as the country reeled under record inflation, which stemmed in part from the linkage to the dollar and record high oil prices.

Gulf Arab countries, except for Kuwait, tie their currencies to the dollar and their central banks invest heavily in dollar-denominated assets.

Ibrahim also saw no determination in the Organization of the Petroleum Exporting Countries to replace the dollar as a pricing unit for oil deals.

"I do not see anything real, no real effort ... in OPEC. I don't think there is a real discussion on the unit of pricing oil," he said.

A long-running debate over the currency used for commodity dealings was revived again in October by a British newspaper that said China, Japan, Russia and France were in secret talks with Gulf Arab states to stop using the dollar for oil trading.

Big oil producers denied it at the time, but dollar weakness has kept alive the question of whether it can remain the world's reserve currency.

But Qatar's Oil Minister Abdullah Al Attiyah said in October the debate was ongoing on using the U.S. dollar for oil trade or shifting to a basket of currencies.

The dollar index, a gauge of the greenback's performance against six major currencies, hit a 15-month low of 74.774 on Wednesday.

Analysts said inflation in the region is much lower now than in 2007, when speculation about dropping the pegs swirled, while key economies in the region - Saudi Arabia and United Arab Emirates - are slowly recovering from the downturn.

"Before we had overheating economies and rising inflation, now we have slow growth economies and lower inflation," said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole in Riyadh.

"Qatar is witnessing periodic deflation even if it will witness the highest real GDP growth rates in the Gulf by far. The likelihood of a currency regime change now is nil," he said.

Average inflation in the region should stand at 3.8 percent next year, slightly up from 3.7 percent in 2009 but well down from 10.8 percent in 2008, according to the International Monetary Fund.

The global lender is forecasting the OPEC member economy will expand by 11.5 percent in the calendar year of 2009 and by 18.5 percent next year on the back of a massive expansion of its gas facilities. (Reuters)

Arabian Business: why we're going behind a paywall

Ivo Cerckel 10 years ago

The dollar peg determines the value of the Qatari riyal The dollar has no value, therefore the riyal has no value. Qatar wants to know whether it is opportune to keep the riyal pegged to the dollar. Suppose now that the examination of this question would lead to the answer that it is opportune to drop the peg of the riyal to the dollar. How will the value of the riyal, or of the GCC single currency, be determined? Money is a good that is readily accepted in a given geographical area and that is sought for the purpose of being re-exchanged. Qatar has large oil and gas reserves. Oil and gas are liquids. These cannot directly serve as or function as money as they cannot be transferred like gold from hand to hand.. As oil and gas are however the only commodities in the world that are large enough for gold to hide in, gold is hiding in there. Oil and gas producers do indeed exchange their paper gas&petrodollars for the real thing, gold. Gold will soon have the same role to fulfil as the Mona Lisa at the Louvre. A wealth reserve in the strong room (the Louvre) of a Monetary Union with a currency, the Asian currency. FreeGold means that the currency should have a Gold component and a paper component, but that a "firewall""should be established or instituted between the two so that Gold’s valuation as a wealth-preserving asset cannot be pulled lower by the inevitable inflation of the paper component of circulating currencies. It is the marking to market (MTM), not to model like the Fed, the US central bank, of Gold (and thus gas and oil in which gold is hiding) reserves which should provide that wall. Yes, Gold is also an industrial metal, but only slightly. Gold is mostly a monetary metal. Gold also maintains its value while paper currencies only lose theirs over time because of inflation. And you can't touch it for security when things really get bad, such as when currencies fail, which happens more often than we realize. Many of us keep Gold bars or coins in the safe or under the mattress just in case, or wish we did. Why not a central bank? Unforeseen calamities happen, as we learned, said Fabrice Taylor this week in The Globe and Mail. ("A rock-solid case for gold reserves") In order to continue to instil "confidence" in other people, the US dollar (c.q, any other currency - whether strong or weak, Mr Geithner, secretary of the USA treasury) would need a universal collateral which is the only thing which could demonstrate the dollar’s credit-worthiness. That collateral is Gold (hiding in oil and gas).