Thursday, June 29, 2006

UAE 'importing good portion of inflation from the weakening greenback': Kheleej Times

Steve Brice said, "The UAE was importing good portion of inflation from the weakening greenback. Though domestically soaring rents have also caused strain."

He said: "In the context of local requirements seizing control of monetary policy and thus protecting the economies from excessive swings in the economy, I believe this criticism could be valid. In the context of global imbalances greater exchange rate flexibility would have a marginal impact."

Brice said the huge current account surpluses are caused by the surge in US dollar based international oil prices, a local currency appreciation would have no impact on oil revenues. "There are two transmission mechanisms via which such a currency appreciation could help address global imbalances. First, a currency appreciation would increase the international purchasing power of local currency revenues, which could boost imports. Second, the non-oil sector would suddenly become less competitive, reducing non-oil exports to the further benefit of imports," he said.

However, the economist was of the view that for these to have an impact on global imbalances, the currency shifts would have to be dramatic and this would reduce the value of the region's foreign asset holdings, denominated in US dollar and undermine crucial diversification efforts.



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