UAE, Qatar may ditch dollar peg in six months, says Merrill
Khaleej Times - 16/05/2008 [-] Text [+]
(MENAFN - Khaleej Times) The UAE and Qatar, facing soaring inflation, are expected to ditch the dollar peg within six months, but Saudi Arabia will wait until late 2009 to break its decades-old link with the tumbling greenback, economists said.
The Kuwaiti dinar, which abandoned its dollar peg in favour of a basket of currencies almost a year back, will continue to appreciate against the US currency, currencies supported by stronger fundamentals and credible central banks are expected to outperform their peers in the Europe Middle East region, according to the latest research by Merrill Lynch economists.
Merrill Lynch, one of the world's leading financial management and advisory companies, said in its research report titled "ML global currencies ? forex weekly: New forex forecasts" said the dollar should continue to recover versus euro and the Anglo-Saxons . "In EMEA we expect a volatile path within the forecast period."
The report said in Asia, the managed pegs remain largely unchanged as a result of the effects of large basic balances and policy response to higher inflation. "In Taiwan, we forecast a stronger exchange rate against the dollar to reflect the changing sentiment following an expected improvement in the political outlook. Our forecast changes are for weaker exchange rates in Korea, India and the Philippines. Korea and India are also adversely impacted by higher oil prices."
According to Merrill Lynch's currency experts, dollar is expected to have a general recovery against many G-10 currencies. "For second half 2008, the weakness in the US economy has mostly been factored into the dollar, while the deterioration elsewhere should be built in. Thus, the dollar can stage a recovery even though the US economy will remain relatively weak."
However, the forecast by the financial management firm is contrary to the views expressed in this regard by GCC monetary authorities who are pressing ahead with a long-planned monetary union by 2010.
GCC central bankers speaking after their meeting recently have reiterated their stand in favour of the dollar peg to ensure that the currency union goal is achieved as targeted.
The UAE Central Bank Governor Sultan bin Nasser Al Suwaidi said there was no intention for the time being to de-peg currencies from the dollar, maintaining that since decline of the dollar is a temporary phenomenon GCC should not take long-term decisions on short-term issues.
Currency experts and economists are also of the view that a sustained link with the weakening dollar would further fan inflation. They believe it is the time to consider change as a dollar-peg would not be in the long-term interests of GCC members who are under pressure for a revaluation to offset imported dollar inflation.
The International Monetary Fund, on the other hand, supports GCC central bankers by declaring its solidarity with the dollar peg.
Cautioning that dirham's de-pegging from the dollar or revaluation could have little impact in controlling escalating prices, Mohsin Khan, Director of IMF's Middle East and Central Asia Department (MCD), said last week that the benefit of the dollar-peg outweighs its negative impact for oil exporting GCC countries that account for combined external assets of $2 trillion. "With a 20 per cent revaluation, the region would have to take a big hit with the value of their overseas assets shrinking by $400 billion. Dollar denominated oil revenues will also suffer a similar setback."
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