To Peg or Not To Peg
November 26, 2009
By (SAL):
With the expected introduction of the Gulf Cooperation Council (GCC) single currency in 2010, the peg issue is gaining a lot of momentum in the region these days. Should the unified currency be fixed to the U.S. dollar, to a basket of currencies, or simply let the currency float with ongoing exchange market interventions.
In 2003, GCC countries pegged their currencies to the U.S. dollar in efforts to facilitate the launch of the Gulf monetary union and single currency. As close allies to the U.S. and oil exporting nations, GCC countries felt it was necessary to peg their currency to the dollar since their primary export, oil is sold in dollars. However, that has resulted occasionally in times of economic destabilization and surging inflation.
Over time, GCC exports have become more diversified and a more flexible exchange rate policy such as pegging to a basket of currencies might provide more stability to the region.
As the U.S. dollar plunged to a 15-month low debate has intensified on the choice of type of exchange rate regime. With the exception of Kuwait, which dropped its peg to the U.S. dollar in 2007 in favor of a basket of currencies, Bahrain, Saudi Arabia and Qatar are still pegged to the dollar. While Kuwait has no plans to return to the dollar peg, both Qatar and Saudi Arabia have repeatedly questioned their dollar currency peg.
Pegging to a basket of currencies has provided Kuwait with a more flexible monetary policy than it used to. With the extraordinary amount of debt the U.S. government has taken, weakening dollar, and record low interest rate- GCC countries should begin to reassess their exchange rate regimes before inflation gets out of control once again. The rising oil prices and anticipated growth in the GCC region could spur inflation once again.
Should they continue in lockstep with the U.S. monetary policy and simply wait for the Fed to raise interest rates, or is time to shift to a basket of currency peg?
November 26, 2009
By (SAL):
With the expected introduction of the Gulf Cooperation Council (GCC) single currency in 2010, the peg issue is gaining a lot of momentum in the region these days. Should the unified currency be fixed to the U.S. dollar, to a basket of currencies, or simply let the currency float with ongoing exchange market interventions.
In 2003, GCC countries pegged their currencies to the U.S. dollar in efforts to facilitate the launch of the Gulf monetary union and single currency. As close allies to the U.S. and oil exporting nations, GCC countries felt it was necessary to peg their currency to the dollar since their primary export, oil is sold in dollars. However, that has resulted occasionally in times of economic destabilization and surging inflation.
Over time, GCC exports have become more diversified and a more flexible exchange rate policy such as pegging to a basket of currencies might provide more stability to the region.
As the U.S. dollar plunged to a 15-month low debate has intensified on the choice of type of exchange rate regime. With the exception of Kuwait, which dropped its peg to the U.S. dollar in 2007 in favor of a basket of currencies, Bahrain, Saudi Arabia and Qatar are still pegged to the dollar. While Kuwait has no plans to return to the dollar peg, both Qatar and Saudi Arabia have repeatedly questioned their dollar currency peg.
Pegging to a basket of currencies has provided Kuwait with a more flexible monetary policy than it used to. With the extraordinary amount of debt the U.S. government has taken, weakening dollar, and record low interest rate- GCC countries should begin to reassess their exchange rate regimes before inflation gets out of control once again. The rising oil prices and anticipated growth in the GCC region could spur inflation once again.
Should they continue in lockstep with the U.S. monetary policy and simply wait for the Fed to raise interest rates, or is time to shift to a basket of currency peg?