Business | Economy
Former Fed chief Alan Greenspan says dollar peg 'needs to go'
Greenspan says floating currencies will help gulf states rein in rising inflation
- By Ahmed A. Elewa, Senior Reporter
- Published: 23:40 February 25, 2008
- Image Credit: Reuters file
- In the short term free floating ... will not fully dissipate inflationary pressure, although it would significantly do so, says Alan Greenspan, Former Chairman of Federal Reserve.
Abu Dhabi Floating the Gulf currencies is the best means to relieving the region's rising inflationary pressures, former Federal Reserve Chairman Alan Greenspan said in Abu Dhabi on Monday.
The dollar peg forces the Gulf states to follow US monetary policy at a time when the Fed is cutting rates to ward off recession and Gulf economies are experiencing an unprecedented boom from oil revenues.
"It [de-pegging] is probably the most useful thing that can be done to stop the increasing influence of foreign assets on the monetary system and therefore the monetary base which is basically the major force in inflationary pressures," Greenspan told the Abu Dhabi Corporate Leadership Forum.
Arab economies have been reeling under rising inflationary pressure. In Saudi Arabia, where inflation was virtually zero for a decade, it recently reached an official level of 6.5 per cent.
According to the New York Times, the oil price boom is fuelling an extraordinary rise in the cost of food and other basic goods that is squeezing this region's middle class.
"Inflation has many causes, from rising global demand for commodities to the monetary constraints of currencies pegged to the weakening American dollar. But one cause is the skyrocketing price of oil itself. It is helping push many ordinary people towards poverty even as it stimulates a new surge of economic growth in the Glf," the report said.
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At a conference in Jeddah yesterday Greenspan said: "In the short term free floating ... will not fully dissipate inflationary pressure, although it would significantly do so."
A number of participants in the Abu Dhabi Corporate leadership forum agreed with Greenspan. Pam Woodall, Asia Econ-omics Editor at The Economist, said that this is the beginning of the end for the US dollar as the currency of choice for foreign exchange reserves.
"If Asian central banks hold today more than 80 per cent of the global foreign exchange reserves, which indicates the shift of the global economy domination towards Asia, it seems quite awkward that the UAE still maintains the peg of its currency to the US dollar," she told Gulf News.
Meanwhile, Shaikh Hamad Bin Jasem Bin Jabr Al Thani, Qatar's Prime Minister, told Reuters that the exchange rate contributes about 40 per cent to inflation in Qatar, where the riyal is 30 per cent undervalued. "We prefer always to act with all the GCC countries. It's now time for the Gulf to have its own currency," Shaikh Hamad said.
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