Pressure mounts to drop peg as dollar's slide seen to continue

DUBAI — With the dollar set for a sustained slide against Euro and other currencies, the UAE is under mounting pressure to revalue the dirham and review its much debated dollar-peg policy, analysts said.

By Issac John (Deputy Business Editor)

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Published: Tue 2 Oct 2007, 8:58 AM

Last updated: Sat 4 Apr 2015, 11:23 PM

Gary Dugan, Chief Investment Officer, Global Wealth Management, EMEA at Merrill Lynch, said the dollar, which has been losing value against a host of foreign currencies, will weaken further against the yen and Swiss franc. "Our greatest conviction is that the dollar will weaken further. One more worrying facet of recent dollar weakness has been market concern that more countries might drop the dollar peg," he said.

Dugan said if the dollar were to lose its lustre as a reserve currency this could prove disruptive to the global financial system. "In the Middle East the market has become concerned that more countries would drop the dollar peg with Opec potentially changing the oil price to a currency basket rather than the dollar."

Financial analysts said the prospect of a prolonged sliding dollar makes central bankers in the MENA region anxious since they sit on a large amount of greenbacks. "While a fast eroding dollar has also caused rampant inflation across the region forcing many to question the continued peg of the GCC's currencies to the dollar, the issue has become intensely pressing for the countries in the region as their enormous current account surpluses are from dollar-denominated oil exports," they pointed out.

Analysts point out that with the international financial markets showing a tendency to migrate toward currency floats of varying openness and the International Monetary Fund supporting discussions on allowing greater exchange rate flexibility, the case for abandoning the dollar peg in the Gulf is gaining increasing support.

Koceila Maames, Middle East economist at French bank Calyon was quoted as saying in a research report that the UAE and Qatar would be the next candidates for revaluations, be it straight ones or through a peg to basket of currencies if the next few months confirm further questioning of the monetary union project.

According to analysts, a weak greenback was the main driver behind a steep rise in costs of GCC imports which are denominated in the euro. "This has started the wheels of inflation rolling full speed ahead at a time when GCC countries do not have the ability to raise interest rates out of step with the US Federal Reserve."

UAE's official inflation rate for 2006 was 9.3 per cent, but international agencies place its above 10 per cent. Analysts said the surge was caused by rent increases as housing supply fell short of population growth. In 2006, the annual inflation reached the highest level of 11.8 per cent in Qatar, followed by the UAE at 10.1 per cent, Oman 3.2 per cent, Kuwait and Bahrain three per cent each, and Saudi Arabia 2.2 per cent. This year, inflation in Kuwait hit 5 per cent in the first quarter and in Saudi Arabia it rose to 3.1 per cent as food and housing costs climbed.

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