Weaker dollar may force Gulf states to appreciate currency

November 1, 2010

, KUWAIT CITY, Nov 1 – A weaker dollar, to which most of the currencies of the Gulf are pegged, may force the region\’s states to appreciate their currencies, a top Arab monetary official said on Monday.

"Our region is not shielded against the impact of the currency war because our currencies are pegged to the dollar," Jassem al-Mannai, director general of the UAE-based Arab Monetary Fund told the Kuwait Financial Forum.

"This (currency war) will impact the Arab economies, especially with regard to (higher) inflation and other problems," said Mannai.

"If the (US) dollar continues to slide, it may force countries in the (Gulf) region to appreciate their currencies."

The forum, in its second year, is a two-day meeting of regional banking and finance leaders, which is this year focusing on the impact of the global financial crisis on oil-rich Gulf countries.

Mannai later told reporters that if a currency war flares, "I believe the GCC states will certainly start discussing and evaluating the impact on their currencies."

Five of the six-nation Gulf Cooperation Council (GCC) states have their currency pegged to the dollar, while Kuwait pegs its dinar to a basket of currencies in which the dollar is believed to constitute between 70-80 percent.

The GCC consists of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, together responsible for supplying just under a fifth of the world\’s crude needs.

The issue of GCC dollar peg was debated during the boom years of 2007 and 2008 when the heating Gulf economy and sliding US economy went in opposing directions.

Gulf states needed to raise interest rates in a bid to halt soaring inflation which hit double digits in most of Gulf states, but were forced to maintain low interest rates because of the dollar peg.

The issue also attracted attention after wild speculations on GCC currencies, especially from foreign money, under the assumption that GCC states were going to appreciate their currencies.

But the GCC states, spearheaded by Organisation of Petroleum Exporting Countries kingpin Saudi Arabia, rejected pressures for de-pegging.

Mannai and senior advisor at the International Monetary Fund Alfred Kammer also warned of rising inflation in Gulf states because of high food prices.

Four GCC states — Bahrain, Kuwait, Qatar and Saudi Arabia — have signed a monetary council pact and set up a monetary council in the Saudi capital Riyadh, while the remaining two states pulled out.

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