DUBAI: The case for Gulf oil producers to switch to flexible exchange rates to fight high inflation and strengthen their currencies will not go away even as the US dollar’s rebound buys them time to rethink their dollar pegs.
Gulf policy-makers who faced growing popular pressure to revalue their currencies have been relieved as the greenback recouped most of its 2008 losses and the US Federal Reserve stopped slashing interest rates.
Yet while the dollar rebound will dampen inflationary pressures by easing the cost of food and commodity imports to the desert states, their booming economies — and monetary policy needs — remain out of step with the United States. “The case for currency reform is still strong even if the pickup in the value of the dollar has made it less urgent,” said Simon Williams, senior economist at HSBC in Dubai. “The Gulf is a fast-growing, dynamic economy that would benefit immensely from having control over its own monetary policy.”
Even before the dollar began rising in late-July, Gulf policy-makers threw their support behind reviving a regional plan to create a single currency, and managed to ward off bets other states would follow Kuwait’s lead and sever their dollar pegs.
Kuwait started tracking an undisclosed currency basket in May 2007, when the euro-dollar was $1.34, arguing that dollar weakness was stoking inflation by making imports more expensive.
Gulf currencies remain weak as their economies, set to soar past $1 trillion in size this year, defy a global economic downturn on a more than five-fold rise in oil prices since 2002.
In February, months before the euro-dollar hit a record above $1.60, Qatar’s prime minister said his country’s riyal currency was about 30 percent undervalued. At the time, the euro-dollar was at $1.48, just above its level on Thursday.
Since then, inflation has soared above 10 percent in five of the six states that make up the Gulf Cooperation Council (GCC), sparking protests among migrant workers in the United Arab Emirates, Bahrain and Kuwait over wages lost to the weak dollar. “The currencies are still undervalued so the dollar rally hasn’t really altered the reform argument,” said Paul Gamble, head of research at Riyadh-based Jadwa Investment.
“The relevant authorities have been more consistent in expressing their willingness to maintain these pegs. The dollar rally is making it a lot easier for them not to do anything.”
