US warms up to Gulf currency reforms

US warms up to Gulf currency reforms
By Babu Das Augustine, Banking Editor
Published: May 26, 2008, 00:02


Dubai: The US Treasury's recent report to Congress on International Economic and Exchange Rate Policies (FX manipulation report) hints at a potential US nod for currency reforms in the Gulf.

Analysts said that the report points to a shift in the US Treasury's approach to Gulf countries' exchange rate policies in the context of rising inflation and upward pressure on real exchange rates.

"The US recognises significant appreciation pressures on the Gulf Cooperation Council (GCC) countries. From a fundamental standpoint, we believe the US authorities have hinted that there is a need for more exchange rate flexibility," said Emma Lawson and Benoit Anne, currency analysts of Merrill Lynch.


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The report does not suggest any solution to the undervalued Gulf currencies. However, analysts believe that the very fact that the Treasury has admitted that the Gulf currencies are undervalued hints at political support for change.

"The latest report highlights the rigidities in the GCC currencies, specifically Saudi Arabia. This represents a modest change in focus, but we believe a big signal for the currencies of the GCC," said Lawson and Anne.


The US investment bank said the UAE and Qatar will probably move to a currency basket in the next few months, with their respective currencies appreciating five per cent before the end of the year. Saudi Arabia is unlikely to follow until late next year.

The Treasury report recognises the need for some adjustment to real effective exchange rates in the region, especially in the UAE and Qatar where prices are rising as a result of rigid exchange rates.

"We believe that if the US were comfortable with the idea of GCC currency appreciation, it would ultimately make it much easier for the GCC authorities to break the dollar peg from a diplomatic standpoint," Merrill Lynch said.

Objectives: fx manipulation report

The FX Manipulation Report was aimed at determining if trading partners were manipulating currencies but also to outline the currency practices of the major trading partners of the US.

The report examines whether countries manipulate the exchange rates for purposes of preventing the balance of payments adjustments or gaining unfair competitive advantage in international trade.

If any country is found to be a currency manipulator, it is required to hold talks with the US government.

The report has not cited any country as a manipulator since 1994 (China). Since the launch of the report 14 years ago, the only countries that have been asked to modify their foreign exchange stances have been China, Japan, South Korea, Taiwan, Malaysia, Hong Kong, Singapore and Russia.

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