Business | Economy
Gulf 'should not depeg in a hurry'
Gulf countries facing mounting inflationary pressure and declining purchasing power due to the currency pegs and relatively inflexible monetary policies should not rush to revalue or depeg their currencies now, said Michael Dicks, managing director, head of research and investment strategy of Barclays Wealth.
- By Babu Das Augustine, Banking Editor
- Published: 01:28 January 31, 2008
- Image Credit: Supplied Picture
- Michael Dicks, managing director, head of research and investment strategy of Barclays Wealth.
Dubai: Gulf countries facing mounting inflationary pressure and declining purchasing power due to the currency pegs and relatively inflexible monetary policies should not rush to revalue or depeg their currencies now, said Michael Dicks, managing director, head of research and investment strategy of Barclays Wealth.
"They [Gulf states] withstood inflationary pressure and demands to delink from the dollar for a long period. Now, the dollar seems to be near its historical bottom and stands a better chance of turning around.
"The US interest rate cuts as part of the policy package to fight recession could result in a further decline in the dollar, but to a lesser degree, and from the second half the greenback should begin to edge up," Dicks said.
While recognising that further Fed rate cuts are likely to come, which would result in additional interest rate cuts in the GCC fuelling further inflation, Dicks said in the absence monetary policy flexibility, regional governments will have to use fiscal policy tools to limit inflation.
"Given the fact that it will not be easy to curtail spending and demand growth overnight, subsidies and selective handouts to the most vulnerable sections of the society can help as a short term measure to mitigate the adverse impact of inflation. However, it is not solution to the problem," he said.
Fiscal stimulus
The US' counter recessionary policy package that includes interest rate cuts and the $145 billion fiscal stimulus for the economy is expected to have its impact on the economy from the third quarter of this year, which should see the dollar and other asset prices recovering, he said.
According to Dicks, equity markets in the US and the rest of the developed world have already priced-in the impact of a US recession.
"Markets seem to have overreacted to the fear of recession. Obviously, currently there is too much pessimism in the market. The recent corrections have driven down the valuations substantially.
"Once the message gets across the markets that the recession is not as bad as it was originally anticipated, equity prices and exchange rates should improve," Dicks said.
The dollar shed about 11 per cent against the euro, 6 per cent against the yen and four per cent against the sterling through 2007 taking it down more than 20 per cent in real terms from its peak in late 2001.
"On a fair value scale, dollar is now beginning to look cheap. However, we are loath to suggest buying it just yet. Only once the economy is out of the woods, and the Federal Reserve has finished cutting interest rates, do we expect the attraction of cheap dollar to justify long position," he said.
Gold as an asset class over a longer-term horizon is not seen as a safe heaven.
"We remain relatively positive on the outlook for gold prices over the next 12 months. Gold's prospects are buoyed by the combination of dollar weakness, oil price strength, tense geopolitical environment and the likelihood of an upside surprise in inflation and inflation volatility. But over a longer horizon, prices are likely to rationalise," he said.
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