Dollar peg needs to be rethought

Dubai: GCC governments need to consider new ways of reducing their exposure to the US dollar, local economists said on Monday.

The currencies of the UAE, Saudi Arabia, Bahrain, Qatar and Oman are all pegged to the greenback, which has depreciated in value against all the world's major currencies in recent weeks.

Kuwait dropped the dollar peg in 2007 and switched its exchange rate mechanism to a basket of currencies in a bid to tackle rising inflation; a move that some analysts say other GCC countries should consider following.

The dollar rallied briefly yesterday after President Barack Obama announced that congressional leaders had reached an agreement to avert a debt default but soon reversed gains, hitting a record low against the safe-haven Swiss franc.

The political fallout between Democrats and Republicans over the country's $14.3 trillion (Dh52.5 trillion) debt ceiling, which is set to rise by up to $2.4 trillion, has left its mark on the GCC and led to increased nervousness about the region's exposure to the dollar.

Dollar dependence

"Once the dust settles, the GCC countries have to seriously start thinking about lowering their dependency on the US dollar peg," said Mohammad Ali Yasin, chief investment officer at CAPM Investment.

"Kuwait is pegged roughly 70-80 per cent to the dollar and approximately 20 per cent to a mixed basket of other currencies. Even if they [GCC countries] have no immediate plans, the speculation over the dollar peg is a long-term problem. All the gains that are being made from high oil prices will be countered by a depreciating dollar," he added.

Ali Yasin said Gulf investors are looking to reduce their exposure to the dollar whilst actively diversifying cash into other investment vehicles.

"There is no guarantee the dollar will return to its previous value; it could remain devalued against all the major currencies, which would have a knock on effect for the region," he said.

"Nobody is saying anything at the moment because it would increase volatility and further unsettle the situation. But actual plans have to be put in place and the GCC countries have to find ways of lowering their risk to the negative effects of the dollar on their currencies and earnings," he added.

According to Ali Yasin, imports to the GCC will also be impacted by the US debt situation with rising inflation affecting the cost of essential goods across the region.

"The situation will become clearer in 2012. We might not see the effects of inflationary increases immediately but the region's economy will suffer unless member states find a way of lowering their dependency on the dollar," he said.

The UAE Central Bank said last week it remained committed to the currency peg between the dirham and the greenback, adding that the dollar was exposed to price fluctuations like all major currencies.

Common approach

"The most likely scenario of a change in the currency regime in the Gulf countries would be a common, simultaneous approach from the group, which would happen after progress has been made on the monetary union front," said Philippe Dauba-Pantanacce, senior economist for global markets, Middle East and North Africa, at Standard Chartered Bank

"But the monetary union project has stalled. Furthermore, there seems to be no appetite for a currency regime reform. As of today, it would be a major step into the unknown and much more technical capacities would need to be built locally to start running an independent — or quasi independent — monetary policy," he added.

According to Dauba-Pantanacce, the reason Gulf countries have not announced any immediate plans to depeg from the US dollar is because revenues are measured in the currency, which contends a lot of the possible problems arising from potential dollar movements.

"No market is more transparent, liquid and deep than the US market. So even in the event of a downgrade we do not think that it will pose a real challenge to the supremacy of the US Treasury as the world financial asset benchmark," Dauba-Pantanacce said.

Dollar continues fall

The dollar fell 0.5 per cent versus the Swiss franc to 0.78153 francs on the Electronic Broking Services (EBS) trading platform, well below last week's record low of just above 0.7850 francs. Broad demand for the Swiss currency also pushed the euro to a fresh record low of 1.12628 on EBS.

"The dollar has already fallen a long way over the last decade in trade-weighted terms. Of course, this does not mean that it cannot fall further," said Pradeep Unni, vice president at Richcomm Global Services, Dubai Multi Commodities Centre in note to investors.

"We do see more upside for the Swiss franc. But the dollar is looking increasingly under-valued relative to other major currencies, notably the yen and the euro, which we expect to drop back to ¥85 and $1.40 respectively by year-end and fall further in 2012," Unni added.