Thursday, May 29, 2008

Green light for de-pegging?

The National
The UAE and Qatar could abandon their currency pegs to the dollar and move to a basket of currencies within months, causing a five per cent appreciation before the end of the year, a Merrill Lynch report said yesterday [May 25].
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Saudi Arabia was unlikely to follow until late next year, Merrill said in the report entitled “US green light for the GCC”.

The US Treasury made mention of Gulf currencies for the first time “in recent history”, according to Merrill. The US investment bank took the focus on rising inflation as a sign that Washington no longer fears that the dollar will weaken significantly or that it will begin to lose its status as the world’s reserve currency if governments in the six-member GCC remove their pegs.

Removing the dollar peg would allow Gulf central banks to raise interest rates as a means of constraining money supply and controlling inflation. However, many UAE officials have spoken publicly against such a move because it could cause instability and reduce the value of their dollar-denominated savings in dirhams.

While recognising that the inclusion of GCC currency issues in the US Treasury report represented only “a modest change in focus”, Merrill concluded that it was nevertheless “a big signal for the currencies of the GCC”.

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