Dollar's Woes Eyed in Persian Gulf
Monday May 21, 10:34 am ET
By Barbara Surk, Associated Press Writer
Dollar Could Be Victim of Gulf Region's Battle With Inflation
DUBAI, United Arab Emirates (AP) -- With Kuwait abandoning its currency's link to the dollar, the United Arab Emirates may be the next Gulf state to cut its reliance on the sagging U.S. currency -- a move that could hasten the greenback's decline.
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On Sunday, Kuwait's Central Bank governor, Sheik Salem Abdul Aziz al Sabah, removed the Kuwaiti dinar's peg to the dollar and linked it instead to a basket of currencies. The Kuwait Central Bank believes that by raising the value of the dinar and, later, adjusting interest rates, it can curb inflation that has hurt the economy of the oil-rich emirate.
Traders had expected Kuwait to take action to bolster the dinar, and the Central Bank's move did not immediately play out in currency markets. The dollar edged slightly higher against the euro in Frankfurt on Monday, to $1.3500 per euro, versus the $1.3505 it bought in New York on Friday.
"So far the dollar has held up quite well," said Steve Brice, head of research for Middle East and South Asia at Standard Chartered Bank in Dubai.
Brice said Kuwait's unilateral move away from the dollar makes it easier for other countries in the six-nation Gulf Cooperation Council to follow suit.
The inflation-buffeted Emirates is most likely, but Brice gave the Emirates Central Bank just a 25 percent chance of cutting the links between its currency -- the dirham -- and the dollar.
"It is clearly possible that the UAE delinking from the dollar would undermine it," Brice said. "It would be seen as signaling to the rest of the region that such moves were acceptable."
Central bankers in the other four GCC nations -- Oman, Qatar, Bahrain and Saudi Arabia -- spoke out in April against Kuwait's plans and are less likely to follow suit, said HSBC Bank economist Simon Williams.
But the U.S. dollar could still be hurt by other potential moves to shift away from the region's overwhelming dependence on the American currency.
The as yet-unannounced makeup of Kuwait's currency basket could result in a large sell-off of dollars, especially if the staunch U.S. ally chooses a mixture based on the pricing of its imports, many of which are denominated in relatively expensive euros.
Brice said the dollar could also be undermined if Gulf states move to price oil in currencies other than the dollar, which would increase their revenues.
Currency diversification by the Gulf's quasi-government investment agencies, with an estimated $1.5 trillion in holdings, could depress the sinking greenback even further, Brice said.
For now, economists say these scenarios are unlikely.
Although economists were not surprised by Kuwait's direction of change, Williams said they were "slightly taken aback" by the decision to trade the dollar peg for a currency basket. Kuwait just recently pegged its dinar against the dollar, in 2003, to comply with a plan to unify currencies of the Gulf similar to the European Union's euro by 2010.
A Gulf monetary union has lost political backing over the last year. Kuwait's decision makes a single Gulf currency even less likely, Williams said.
"This region can continue to prosper with or without a single currency in place," he said.
