Lloyds chief blames 'political inertia' for Gulf dollar pegs
by Joanne Bladd
Sunday, 14 February 2010
WARNING: A senior exec with Lloyd's private banking arm has said that the Gulf states' dollar pegs are unnecessary.
The energy-rich Gulf states have failed to free their currencies from the troubled US dollar because of political inertia, a senior executive in Lloyd’s Banking Group’s private banking arm has said.
Dr George Lo, chief investment officer at Lloyd’s IPB, said the six GCC states are reluctant to drop the greenback for fear of offending the US, despite the peg no longer making financial sense.
“In the past, the dollar was a strong currency. For a lot of emerging markets, you aspire to that kind of strength. That’s why you use it as the anchor. Today, it’s not serving the purpose. [The dollar] is sinking,” he told Arabian Business.
“If you look at the chart versus the Swiss franc, it’s very obvious. In the past, there were lots of political considerations; friendship, it’s a signal you’re being impolite to the US government. But in today’s world it’s a business. We should be thinking about this like a business.
“[To de-peg] would be a signal to the world that the dollar is sinking further, you are losing your close allies’ confidence. But that is a financial fact,” he added.
Kuwait broke rank by unshackling its dinar from the dollar in 2007, switching the exchange rate mechanism to a basket of currencies in a bid to tackle soaring inflation.
Should another Gulf state follow suit, said Lo, the effect would be “like a domino”.
Pegged Gulf states are currently forced to trail the monetary policy of the US Federal Reserve, despite differences in inflation rates, projected growth and other factors.
“If one state starts doing it, others will follow. It’s like a domino effect. I would expect the region to react,” he said.
Last month saw a Gulf monetary union agreement take effect, backed by Saudi Arabia, Kuwait, Qatar and Bahrain. A monetary council was established in December to choose a currency regime and map out a timeline for its implementation.
Oman and the UAE, the second-largest Arab economy, have pulled out of the project.
by Joanne Bladd
Sunday, 14 February 2010
WARNING: A senior exec with Lloyd's private banking arm has said that the Gulf states' dollar pegs are unnecessary.
The energy-rich Gulf states have failed to free their currencies from the troubled US dollar because of political inertia, a senior executive in Lloyd’s Banking Group’s private banking arm has said.
Dr George Lo, chief investment officer at Lloyd’s IPB, said the six GCC states are reluctant to drop the greenback for fear of offending the US, despite the peg no longer making financial sense.
“In the past, the dollar was a strong currency. For a lot of emerging markets, you aspire to that kind of strength. That’s why you use it as the anchor. Today, it’s not serving the purpose. [The dollar] is sinking,” he told Arabian Business.
“If you look at the chart versus the Swiss franc, it’s very obvious. In the past, there were lots of political considerations; friendship, it’s a signal you’re being impolite to the US government. But in today’s world it’s a business. We should be thinking about this like a business.
“[To de-peg] would be a signal to the world that the dollar is sinking further, you are losing your close allies’ confidence. But that is a financial fact,” he added.
Kuwait broke rank by unshackling its dinar from the dollar in 2007, switching the exchange rate mechanism to a basket of currencies in a bid to tackle soaring inflation.
Should another Gulf state follow suit, said Lo, the effect would be “like a domino”.
Pegged Gulf states are currently forced to trail the monetary policy of the US Federal Reserve, despite differences in inflation rates, projected growth and other factors.
“If one state starts doing it, others will follow. It’s like a domino effect. I would expect the region to react,” he said.
Last month saw a Gulf monetary union agreement take effect, backed by Saudi Arabia, Kuwait, Qatar and Bahrain. A monetary council was established in December to choose a currency regime and map out a timeline for its implementation.
Oman and the UAE, the second-largest Arab economy, have pulled out of the project.