Gulf States May End Dollar Pegs, Kuwait Minister Says|
By Fiona MacDonald and Matthew Brown
Last Updated: May 1, 2008 10:21 EDT
May 1 (Bloomberg) -- Gulf states are considering dropping their
pegs to the dollar after the U.S. currency's decline stoked
inflation across the region, Kuwaiti Finance Minister Mustafa
al- Shimali said.
``Yes, there are some'' Gulf Cooperation Council states
considering dropping their pegs to the dollar, which has fallen 13
percent against the euro in the last 12 months, al-Shimali said in
an interview in Kuwait late yesterday without naming the countries.
``Some countries will do what we are doing.''
Al-Shimali's comments may restoke speculation of a change in
Middle East currency systems that eased after the United Arab
Emirates and Qatar last month ruled out any revaluation or dropping
the dollar peg in the short term. The issue will remain a key issue
as long as inflation remains high.
``Inflation is rising in the Gulf to a great extent because of
loose monetary policy,'' said Marios
Maratheftis, head of research for Standard Chartered Plc in the
Middle East in a telephone interview from Dubai. ``Tightening
monetary policy can only happen if they drop their currency pegs or
strengthen the currency, preferably both.''
The U.A.E., Bahrain and Qatar lowered their benchmark interest
rates today by a quarter point, matching a cut by the U.S. Federal
Reserve a day earlier. The move is needed to maintain the dollar
pegs. Saudi Arabia is on its weekend while Oman moves its interest
rates in line with the London Inter Bank Offered Rate.
Inflation is running close to 10 percent in Saudi Arabia and the
U.A.E., while Qatar's consumer prices rose 14 percent in the fourth
The Kuwaiti dinar has appreciated 7.9 percent against the dollar
since the nation in May became the only Gulf Arab state to drop its
peg to the U.S. currency. Contracts to buy U.A.E. dirhams in 12
months time are trading at a 2 percent premium and Saudi riyal
forwards are trading at a 1.3 percent premium to the spot price,
suggesting that some traders are betting that those countries will
follow Kuwait in revaluing. The link to the dollar meant that
imports in euros and other currencies that have strengthened against
the dollar became more expensive.
The idea of dropping the peg ``has been started by other Gulf
countries and they are partially going this way because the dollar
has been going down for some time,'' al-Shimali said yesterday.
``This news has already been in newspapers,'' al-Shimali told
reporters at a meeting of the Fourth World Economic Forum in Kuwait
Reuters reported today that al-Shimali said he was citing
newspaper reports and not expressing his own opinion when commenting
to Bloomberg on the future of the Gulf dollar pegs.
When asked at the forum about Gulf states considering dropping
their pegs, al-Shimali told reporters that he would not comment on
behalf of Gulf states.
Officials at the Qatari, Omani and U.A.E. central banks were not
immediately available. The Bahraini and Saudi central banks were
Revaluation speculation peaked in November after U.A.E. central
bank Governor Sultan
Bin Nasser al-Suwaidi said he was considering dropping the
dirham's peg to the dollar, and a Saudi Arabia central bank official
said that Gulf states may revalue their currencies together.
All the GCC states, apart from Oman, are planning to form a
single Gulf currency by 2010. The group's central bank governors
will meet in June in an attempt to get the project back on schedule.
``The case for currency reform is strong,'' Simon
Williams, chief Middle East economist at HSBC Holdings Plc, said
in a telephone interview from Dubai. ``The inflationary pressures
the Gulf faces not only demand a stronger currency, they also
require an independent monetary policy. The issue is not going to go
away, but I don't believe that change is close.''
Original article: Worthy News
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