Gulf nations may be forced to abandon peg on weakening US dollar
DUBAI: When central bankers in the Middle East say they have no plans to end their fixed exchange rates to the US dollar, the currency market hears the opposite.
Merrill Lynch & Co predicts either the United Arab Emirates or Qatar will cut its dollar peg within six months.
Standard Chartered Plc says the six Gulf Cooperation Council nations need to raise the value of their currencies by 20%.
The difference between the price of the Saudi riyal and the cost of buying it in a year using forward contracts has widened 10-fold since October, as traders bet the kingdom will sever its 21-year-old link to the dollar, according to data compiled by Bloomberg.
“The dollar peg is doomed,'' said Jim Rogers, chairman of New York-based Rogers Holdings and a former partner of hedge fund manager George Soros.
The gulf countries, which supply 22.2% of the world's oil, according to BP Plc, are under pressure to abandon their fixed exchange rates after the US dollar tumbled 10% against the euro this year.
Venezuela and Iran, members of the Organisation of Petroleum Exporting Countries (Opec), want to price more crude in other currencies. Inflation in the region is accelerating at the fastest pace in at least five years because central banks follow US Federal Reserve policy.
The ties are already weakening. Kuwait dropped the dinar's fixed exchange rate in May and it has strengthened 4.5%.
UAE central bank governor Sultan Bin Nasser al-Suwaidi said last week his country, a federation of sheikhdoms, may change its policy. The plan was “not to drop the dollar peg but maybe to reduce it to a basket which will consist of more dollars, but not totally 100%,'' he said in an interview in Gwacheon, South Korea.
Saudi officials rejected a suggestion by Iran and Venezuela to discuss ending the practice of pricing crude in dollars at an Opec summit in Riyadh on Nov 16.
The kingdom, the world's largest oil exporter, did not want the US currency to “collapse'', and would not consider the proposal, Saudi Foreign Minister Prince Saud Al-Faisal said at a meeting of oil and finance ministers that was accidentally broadcast to journalists.
The US Dollar Index, which measures the greenback's performance against six trading partners, has fallen 9.4% this year to a record low.
The fact that the link is being debated at all is a reflection of the weakening dollar and the decline of US political and economic dominance. The currency accounted for 64.8% of world reserves at the end of June, down from 72.6% in 2001, according to the International Monetary Fund.
Abandoning the peg would risk driving prices higher for Americans, the biggest oil consumers. – Bloomberg