Rising inflation main hurdle to currency union
By Issac John (Deputy Business Editor)
11 June 2008
DUBAI — Soaring rates of inflation in the Gulf, projected to average at 11 per cent in 2008, and ease to around nine per cent in 2009, pose the main challenge to GCC currency union, economists said.
In the wake of GCC Central Bankers breakthrough agreement on Monday setting up a regional central bank, analysts said the prevailing double-digit inflation rates in the UAE and Qatar will continue to be one of the main hurdles in meeting the convergence criterion on inflation, which is a critical aspect of successful currency union.
Marios Maratheftis, Regional Head of Research, Standard Chartered Bank, told Khaleej Times that the most important obstacle for the common currency was the absence of GCC-wide institution. “By 2010 we understand the central bank for the GCC will be in operation, may be the common currency will follow later but for us what is important is the establishment of an institution. I think the development is a breakthrough and very important development indeed.”
According to the official convergence criteria, an inflation rate of no more than two percentage points above the regional average is allowed. "On the basis of 2007 data, Qatar is 6.4 points above the regional average inflation rate and the UAE is 3.5 points above it. Based on our forecasts for 2008 inflation, the UAE is likely to move back to within two points (as the regional average shifts higher this year), but Qatar’s differential is likely to remain in excess of three points," said Samba, a leading Saudi bank.
To meet the target for inflation, although Qatar has proposed stripping out rents from the inflation measure, it has met a cool response from other GCC members.
Analysts said the currency union presents the GCC with an imperative to define a more appropriate level for their exchange rates to ensure that they establish a realistic starting point.
"A satisfactory initial alignment of exchange rates is an essential, if not sufficient, condition for the viability of a GCC common currency. However, a currency union need not involve a fixed peg to the dollar (nor any other currency) and the project therefore also presents an opportunity to introduce a more flexible regime. This would allow the proposed GCC central bank some control over interest rates, and enable it to manage domestic demand more effectively. The end result would likely be more stable and predictable price growth, laying the foundations for sustainable, investment-led economic growth over the long term," the banks economist said.
Since the other convergence criteria, including limiting budget deficits to no greater than three per cent of GDP and public debt burdens of less than 60 per cent of GDP, now lack relevance given the GCC’s booming economies and robust financial indicators, inflation criterion is the main stumbling block to GCC currency union, analysts point out.
Observing that the most pressing challenge facing GCC economies is inflation, economists said a key factor bearing on skyrocketing price stems from the fixed peg to the US dollar. Another factor stoking inflation is increased government spending which has resulted in rapid liquidity growth across the GCC.
"A third factor contributing to demand pressures is the rapid growth of bank credit to the private sector, reflecting the greatly expanding role of the private sector in the regional economic and investment boom. A combination of promising investment opportunities together with highly liquid financial institutions have propelled annualised rates of credit growth to 35 percent or more across the region," they said
Tuesday, June 10, 2008
Saturday, June 7, 2008
GCC central bankers to discuss MU
GCC central bankers to discuss MU
7 June 2008
DUBAI - Gulf Arab central bankers meet on Monday for the second time in less than three months to pick up the pace of Monetary Union (MU) as they resist pressure to drop their dollar pegs amid soaring inflation.
The six-member Gulf Cooperation Council (GCC) will try to flesh out technical issues in their extraordinary general meeting to come up with a final document on monetary union to be presented to the region's leaders by year-end.
"The nature of the meeting is very technical and detailed and the focus will be on establishing the institutional and legal framework for monetary union," said a GCC secretariat official who declined to be identified.
Since last year, the dollar has plunged against the euro, the US Federal Reserve has slashed interest rates six times, and inflation in Qatar and Saudi Arabia have hit record highs.
The need to maintain dollar pegs has forced Gulf countries to cut interest rates in tandem with the Federal Reserve even though their economies are booming, their main export, oil, is priced in dollars and inflation is spiralling.
At their regular meeting in April, the governors discussed removing obstacles to longstanding single currency plans in an effort to prevent unilateral revaluation as the pressure mounts.
Of the six countries, Oman has said it would not join the union at all and Kuwait dropped its dollar peg in 2007, throwing the plan into disarray.
The GCC comprises Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain. Qatar, the world's biggest exporter of liquefied natural gas, holds the revolving chair.
"This is a continuation of our last meeting ... we will follow up on the progress of the technical committees," Bahrain's central bank governor Rasheed Al Maraj said last week when asked by Reuters on the meeting's agenda. "We will not be discussing tackling inflation."
Curbing speculation: Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and Sultan Nasser bin Sultan Al Suweidi, central bank governor, both reiterated this week the UAE had no plans to drop its dollar peg or revalue after meeting US Treasury Secretary Henry Paulson.
Paulson toured Gulf Arab countries, including regional power and key US ally Saudi Arabia, to defend the status of the dollar as the world's reserve currency.
An adviser to the Ruler of Qatar, another Gulf Arab state that pegs its currency to the ailing dollar, said the country needed to act over the dollar peg without being more specific.
"The case for monetary reform is strong but I don't sense that Gulf leaders are persuaded by the arguments for change... There is also a strong preference for joint action over unilateral adjustment," said Simon Williams, regional economist at HSBC.
"I do sense renewed enthusiasm for the currency union but what the market will be looking for is evidence that renewed support for the project is translated into concrete decisions."
Progress on key policy issues such as the type of currency regime, how the central bank will be organised, what powers it might enjoy and what tools it might have at its disposal would be a significant step forward on the road to monetary union.
Ensuring the central bankers reach common ground on the technical aspects of monetary union is key to maintaining the fresh impetus of the last few months and reducing the chance of individual states moving ahead unilaterally.
"We recommend a revaluation of the UAE (dirham)," Gerard Lyons, chief economist at Standard Chartered Bank said on Thursday. "If it doesn't happen the region could see a boom that will become a bust." - Reuters
7 June 2008
DUBAI - Gulf Arab central bankers meet on Monday for the second time in less than three months to pick up the pace of Monetary Union (MU) as they resist pressure to drop their dollar pegs amid soaring inflation.
The six-member Gulf Cooperation Council (GCC) will try to flesh out technical issues in their extraordinary general meeting to come up with a final document on monetary union to be presented to the region's leaders by year-end.
"The nature of the meeting is very technical and detailed and the focus will be on establishing the institutional and legal framework for monetary union," said a GCC secretariat official who declined to be identified.
Since last year, the dollar has plunged against the euro, the US Federal Reserve has slashed interest rates six times, and inflation in Qatar and Saudi Arabia have hit record highs.
The need to maintain dollar pegs has forced Gulf countries to cut interest rates in tandem with the Federal Reserve even though their economies are booming, their main export, oil, is priced in dollars and inflation is spiralling.
At their regular meeting in April, the governors discussed removing obstacles to longstanding single currency plans in an effort to prevent unilateral revaluation as the pressure mounts.
Of the six countries, Oman has said it would not join the union at all and Kuwait dropped its dollar peg in 2007, throwing the plan into disarray.
The GCC comprises Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain. Qatar, the world's biggest exporter of liquefied natural gas, holds the revolving chair.
"This is a continuation of our last meeting ... we will follow up on the progress of the technical committees," Bahrain's central bank governor Rasheed Al Maraj said last week when asked by Reuters on the meeting's agenda. "We will not be discussing tackling inflation."
Curbing speculation: Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and Sultan Nasser bin Sultan Al Suweidi, central bank governor, both reiterated this week the UAE had no plans to drop its dollar peg or revalue after meeting US Treasury Secretary Henry Paulson.
Paulson toured Gulf Arab countries, including regional power and key US ally Saudi Arabia, to defend the status of the dollar as the world's reserve currency.
An adviser to the Ruler of Qatar, another Gulf Arab state that pegs its currency to the ailing dollar, said the country needed to act over the dollar peg without being more specific.
"The case for monetary reform is strong but I don't sense that Gulf leaders are persuaded by the arguments for change... There is also a strong preference for joint action over unilateral adjustment," said Simon Williams, regional economist at HSBC.
"I do sense renewed enthusiasm for the currency union but what the market will be looking for is evidence that renewed support for the project is translated into concrete decisions."
Progress on key policy issues such as the type of currency regime, how the central bank will be organised, what powers it might enjoy and what tools it might have at its disposal would be a significant step forward on the road to monetary union.
Ensuring the central bankers reach common ground on the technical aspects of monetary union is key to maintaining the fresh impetus of the last few months and reducing the chance of individual states moving ahead unilaterally.
"We recommend a revaluation of the UAE (dirham)," Gerard Lyons, chief economist at Standard Chartered Bank said on Thursday. "If it doesn't happen the region could see a boom that will become a bust." - Reuters
Tuesday, June 3, 2008
Qatar must depeg, gov't advisor says
Qatar must depeg, gov't advisor says
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DROP PEG: Al-Ibrahim said Qatar must depeg from the dollar due to the Gulf state's soaring economic growth. (Getty Images)Qatar has to delink its currency from the weakening US dollar as the Gulf Arab country's economy is growing, an economic policy adviser to the country's emir said in published remarks.
"We have to delink," Ibrahim Al-Ibrahim was quoted as saying by the London-based magazine Meed, published late on Friday.
"It does not make sense to stay linked to a currency that is declining while our economy is growing. At a time when our currency should be going up, it is going down."
Al-Ibrahim, economic adviser to Emir Sheikh Hamad bin Khalifa Al-Thani, said he is "working hard" to convince the government that keeping the dollar peg is not in its interest, but that any action should be taken in coordination with other Gulf Arabs.
"The problem is really how to deal with Gulf Arab countries in terms of the objective of having one currency," he said. "We do not want to do anything that will disturb that."
Al-Ibrahim's comments come just a matter of days after Qatar's finance minister flatly dismissed claims made by Merrill Lynch that the Gulf state could soon depeg, labelling the report “baseless”.
“This report is completely untrue and baseless,” Kamal told reporters after a GCC cooperation meeting held in Doha.
Yusus Kamal was responding to a report by the US investment bank that claimed the US government had given Qatar and neighbour the UAE the green light to drop their currency pegs to the dollar to help battle record inflation.
The report said the two Gulf states would move to a currency basket within the next six months.
All Gulf states, bar Kuwait, peg their currencies to the ailing dollar. The dollar peg has been blamed for increasing the cost of imports and restricting the central bank's ability to fight inflation.
Gulf states' dollar pegs forces central banks to track US monetary policy to maintain the relative attractiveness of their currencies.
The US Federal Reserve has been slashing interest rates since September to stave off recession at a time when Gulf central banks should be hiking rates to rein in inflation.
Inflation in Qatar, which has yet to publish first-quarter data, rose slightly to 13.74% at the end of December, its second-highest figure on record, as rents and food prices surged.
Qatar is trying to cap inflation at its current level of 13.7%, below a peak of 15% seen earlier this year, the country's finance minister said this month.
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DROP PEG: Al-Ibrahim said Qatar must depeg from the dollar due to the Gulf state's soaring economic growth. (Getty Images)Qatar has to delink its currency from the weakening US dollar as the Gulf Arab country's economy is growing, an economic policy adviser to the country's emir said in published remarks.
"We have to delink," Ibrahim Al-Ibrahim was quoted as saying by the London-based magazine Meed, published late on Friday.
"It does not make sense to stay linked to a currency that is declining while our economy is growing. At a time when our currency should be going up, it is going down."
Al-Ibrahim, economic adviser to Emir Sheikh Hamad bin Khalifa Al-Thani, said he is "working hard" to convince the government that keeping the dollar peg is not in its interest, but that any action should be taken in coordination with other Gulf Arabs.
"The problem is really how to deal with Gulf Arab countries in terms of the objective of having one currency," he said. "We do not want to do anything that will disturb that."
Al-Ibrahim's comments come just a matter of days after Qatar's finance minister flatly dismissed claims made by Merrill Lynch that the Gulf state could soon depeg, labelling the report “baseless”.
“This report is completely untrue and baseless,” Kamal told reporters after a GCC cooperation meeting held in Doha.
Yusus Kamal was responding to a report by the US investment bank that claimed the US government had given Qatar and neighbour the UAE the green light to drop their currency pegs to the dollar to help battle record inflation.
The report said the two Gulf states would move to a currency basket within the next six months.
All Gulf states, bar Kuwait, peg their currencies to the ailing dollar. The dollar peg has been blamed for increasing the cost of imports and restricting the central bank's ability to fight inflation.
Gulf states' dollar pegs forces central banks to track US monetary policy to maintain the relative attractiveness of their currencies.
The US Federal Reserve has been slashing interest rates since September to stave off recession at a time when Gulf central banks should be hiking rates to rein in inflation.
Inflation in Qatar, which has yet to publish first-quarter data, rose slightly to 13.74% at the end of December, its second-highest figure on record, as rents and food prices surged.
Qatar is trying to cap inflation at its current level of 13.7%, below a peak of 15% seen earlier this year, the country's finance minister said this month.
US dodges issue of Gulf depegging
US dodges issue of Gulf depegging
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DODGING ISSUE: Paulson (pictured) said any move to depeg from the ailing US currency would beUS Treasury Secretary Henry Paulson said on Saturday the dollar peg for currencies in the Gulf Arab countries had served the region well and any changes to the peg would be a sovereign matter.
Dollar pegs in all Gulf Arab states except Kuwait force their respective central banks to match US interest rate cuts, and has helped fuel inflation as their economies are booming due to record oil prices.
This also reduces their purchasing power for goods denominated in other currencies.
Story continues below ↓
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Asked about his concerns over the dollar peg, Paulson, on a visit to Saudi Arabia, Qatar and the UAE, told a news conference: "That is a sovereign decision... The dollar peg, I think, has served this country [Saudi Arabia] and this region well. That speaks for itself."
Paulson's visit follows a report by Merrill Lynch, citing a US Tresury report to Congress, that the US government has given Gulf states the green light to make changes to their dollar-pegged foreign exchange policies, recognising inflation as a problem.
The report by the US investment bank said the UAE and Qatar would move to a currency basket within the next six months, while Saudi Arabia was unlikely to follow until late next year.
Qatar's top economic policy adviser Ibraham Al-Ibrahim was quoted late on Friday as saying that Qatar must de-link its currency from the dollar peg.
But Saudi Finance Minister Ibrahim Al-Assaf, who joined Paulson in the news conference after a series of meetings, reaffirmed his committment to the dollar peg.
"We have no intention of depegging or revaluation," Al-Assaf said. "As Mr. secretary [Paulson] said... it's a position that has served us well. [The peg to the dollar] has served us well and we look at the long-term interest of Saudi Arabia."
Turning to the price of oil, which hit a record high of more than $135 a barrel last week, Paulson reiterated his calls for additional investment in oil producing countries, particularly from foreign sources, to help increase production.
"There is no doubt that the current prices are a burden on economies around the world and a burden on people around the world," Paulson said.
Al-Assaf agreed, saying Saudi Arabia was investing billions of dollars to increase both upstream crude oil production and downstream refining capacity to help meet global demand.
"We don't like these extreme volatilities in the [oil] market. They are not good for the consuming countries and they are not good for the producing countries."
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DODGING ISSUE: Paulson (pictured) said any move to depeg from the ailing US currency would beUS Treasury Secretary Henry Paulson said on Saturday the dollar peg for currencies in the Gulf Arab countries had served the region well and any changes to the peg would be a sovereign matter.
Dollar pegs in all Gulf Arab states except Kuwait force their respective central banks to match US interest rate cuts, and has helped fuel inflation as their economies are booming due to record oil prices.
This also reduces their purchasing power for goods denominated in other currencies.
Story continues below ↓
advertisement
Asked about his concerns over the dollar peg, Paulson, on a visit to Saudi Arabia, Qatar and the UAE, told a news conference: "That is a sovereign decision... The dollar peg, I think, has served this country [Saudi Arabia] and this region well. That speaks for itself."
Paulson's visit follows a report by Merrill Lynch, citing a US Tresury report to Congress, that the US government has given Gulf states the green light to make changes to their dollar-pegged foreign exchange policies, recognising inflation as a problem.
The report by the US investment bank said the UAE and Qatar would move to a currency basket within the next six months, while Saudi Arabia was unlikely to follow until late next year.
Qatar's top economic policy adviser Ibraham Al-Ibrahim was quoted late on Friday as saying that Qatar must de-link its currency from the dollar peg.
But Saudi Finance Minister Ibrahim Al-Assaf, who joined Paulson in the news conference after a series of meetings, reaffirmed his committment to the dollar peg.
"We have no intention of depegging or revaluation," Al-Assaf said. "As Mr. secretary [Paulson] said... it's a position that has served us well. [The peg to the dollar] has served us well and we look at the long-term interest of Saudi Arabia."
Turning to the price of oil, which hit a record high of more than $135 a barrel last week, Paulson reiterated his calls for additional investment in oil producing countries, particularly from foreign sources, to help increase production.
"There is no doubt that the current prices are a burden on economies around the world and a burden on people around the world," Paulson said.
Al-Assaf agreed, saying Saudi Arabia was investing billions of dollars to increase both upstream crude oil production and downstream refining capacity to help meet global demand.
"We don't like these extreme volatilities in the [oil] market. They are not good for the consuming countries and they are not good for the producing countries."
Friday, May 30, 2008
UAE to keep peg despite US go-ahead for currency reform
UAE to keep peg despite US go-ahead for currency reform
Khaleej Times - 29/05/2008
(MENAFN - Khaleej Times) Amid reports that US has given the green signal for the depegging of GCC currencies from a tumbling dollar, the UAE reaffirmed its stance on keeping its currency pegged to the greenback.
UAE Central Bank Governor Sultan Bin Nasser Al Suweidi, responding to remarks made by Merrill Lynch about a recent US Treasury report to Congress, said there was not any move or trend for a depeg or a revaluation.
Quoting the US Treasury report, Merrill Lynch has said the US gave the GCC the green light to change their foreign exchange policies, a move which will have far reaching impact on the currency valuations of the UAE and other Gulf countries. Al Suweidi was quoted by a local Arabic newspaper that the Merrill Lynch report was "weak and lacks transparency."
The report by the US Treasury to Congress on international economic and exchange rate policies, also known as the FX manipulation report, indicated that US has effectively given Gulf countries, reeling under imported inflation resulting from a depreciation of their dollar pegged currencies, the go ahead for making changes to their foreign exchange policies.
An analyst with Merrill Lynch has said the US is helping to lift the political barriers to exchange rate regime changes in the region. "Indeed, if the US were comfortable with the idea of GCC currency appreciation, we believe it would ultimately make it much easier for the GCC authorities to break the dollar peg from a diplomatic standpoint. This is supportive of our bullish view on the GCC currencies. We have re-entered our trade recommendation of a six-month forwards basket of long Kuwait dinar and UAE dirham versus short dollar."
In its report entitled "U.S. Green Light for the GCC," the 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 percent before the end of the year.
According to Merrill Lynch, the US report highlights the rigidities in GCC currencies. "This represents a modest change in focus, but we believe a big signal for the currencies of the GCC. The report also highlights the increased comfort regarding the dollar. There had been market concerns that the US was reluctant to push the GCC countries into a change in currency regime given the possible negative effects on the greenback. This report suggests that those risks have lessened," ML said.
"The report has not cited any country as a manipulator since China in 1994. Studies show that being named is partly due to fundamentals but also to politics. Thus, we believe the new inclusion in the findings section of the report is important."
ML said: "With the US sending a green light for currency regime change, the focus may shift to domestic constraints. We recognise that there may still be some significant domestic resistance to exchange rate regime changes, but overall we believe that a number of GCC countries will ultimately be forced by the market to let their currencies strengthen."
The Treasury report highlighted the increase in inflation in GCC states which has intensified discussions in the region on revaluation or adjustments in currency rate regimes.
"As stressed in the Treasury report, some adjustment to real effective exchange rates in the region - especially in Qatar and the UAE - is taking place through rising prices. The root causes of inflation in the GCC are multiple, including higher food prices, strong demand pressures and abundant domestic liquidity.
Khaleej Times - 29/05/2008
(MENAFN - Khaleej Times) Amid reports that US has given the green signal for the depegging of GCC currencies from a tumbling dollar, the UAE reaffirmed its stance on keeping its currency pegged to the greenback.
UAE Central Bank Governor Sultan Bin Nasser Al Suweidi, responding to remarks made by Merrill Lynch about a recent US Treasury report to Congress, said there was not any move or trend for a depeg or a revaluation.
Quoting the US Treasury report, Merrill Lynch has said the US gave the GCC the green light to change their foreign exchange policies, a move which will have far reaching impact on the currency valuations of the UAE and other Gulf countries. Al Suweidi was quoted by a local Arabic newspaper that the Merrill Lynch report was "weak and lacks transparency."
The report by the US Treasury to Congress on international economic and exchange rate policies, also known as the FX manipulation report, indicated that US has effectively given Gulf countries, reeling under imported inflation resulting from a depreciation of their dollar pegged currencies, the go ahead for making changes to their foreign exchange policies.
An analyst with Merrill Lynch has said the US is helping to lift the political barriers to exchange rate regime changes in the region. "Indeed, if the US were comfortable with the idea of GCC currency appreciation, we believe it would ultimately make it much easier for the GCC authorities to break the dollar peg from a diplomatic standpoint. This is supportive of our bullish view on the GCC currencies. We have re-entered our trade recommendation of a six-month forwards basket of long Kuwait dinar and UAE dirham versus short dollar."
In its report entitled "U.S. Green Light for the GCC," the 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 percent before the end of the year.
According to Merrill Lynch, the US report highlights the rigidities in GCC currencies. "This represents a modest change in focus, but we believe a big signal for the currencies of the GCC. The report also highlights the increased comfort regarding the dollar. There had been market concerns that the US was reluctant to push the GCC countries into a change in currency regime given the possible negative effects on the greenback. This report suggests that those risks have lessened," ML said.
"The report has not cited any country as a manipulator since China in 1994. Studies show that being named is partly due to fundamentals but also to politics. Thus, we believe the new inclusion in the findings section of the report is important."
ML said: "With the US sending a green light for currency regime change, the focus may shift to domestic constraints. We recognise that there may still be some significant domestic resistance to exchange rate regime changes, but overall we believe that a number of GCC countries will ultimately be forced by the market to let their currencies strengthen."
The Treasury report highlighted the increase in inflation in GCC states which has intensified discussions in the region on revaluation or adjustments in currency rate regimes.
"As stressed in the Treasury report, some adjustment to real effective exchange rates in the region - especially in Qatar and the UAE - is taking place through rising prices. The root causes of inflation in the GCC are multiple, including higher food prices, strong demand pressures and abundant domestic liquidity.
Tuesday, May 27, 2008
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.
Do you expect the US to support
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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
Do you expect the US to support
Ditching dollar peg a boon for region
Ditching dollar peg a boon for region
by Talal Malik on Monday, 26 May 2008
POSITIVE MOVE: Gulf states depegging their currencies from the US dolar would be a boon for the region, analysts said. (Getty Images)Gulf states looking at depegging or revaluing their currencies will find the impact is largely positive for the economy, senior economists told ArabianBusiness.com on Monday.
US investment bank Merrill Lynch said on Sunday that the UAE and Qatar would probably depeg from the US dollar and move to a currency basket in the next few months, after the US gave the go-ahead in order to fight inflation.
All Gulf states, bar Kuwait, peg their currencies to the dollar, which forces central banks to follow US monetary policy and limits their ability to bring down inflation, which has soared to record highs across the Gulf.
"I think there would very few losers from an adjustment because the region is so import-dependent and because such a large proportion of the population is expatriate and remitting much of their income," said Simon Williams, a Dubai-based economist at HSBC.
"Overall, I think it will be positive if we see any kind of monetary policy tightening," said Marios Maratheftis, regional head of research at Standard Chartered.
"If something is better for the economy as a whole, it's better in general for all."
Merrill Lynch said in their report 'US Green Light for the GCC' that whilst the UAE and Qatar would make the currency-basket move in the next few months, Saudi Arabia was unlikely to follow until late next year.
Citing a US Treasury report on the GCC, the investment bank said the US government had become more confident about the outlook for the dollar and therefore did not necessarily need Gulf support for its currency.
"We believe the inclusion effectively gives the GCC countries the green light for change," the bank said.
However, regional economists are divided over both whether and when any of the Gulf states will either revalue their currencies or drop the dollar-peg.
"Our view has always been consistently that the region is in need of monetary policy tightening in order to manage the [economic] boom more effectively," said Maratheftis about Standard Chartered's position on Gulf currencies.
"The challenges we're facing in the region are different to the challenges that the US economy is facing. Monetary policy is extremely loose which is leading to inflationary pressures.
"We think the best way of dealing with inflationary pressures is by changing the dollar-peg ideally. This would be the best solution but as the second-best solution we think a revaluation would also help."
Others said that neither the UAE nor Qatar were likely to move to a basket of currencies in the next few months.
"I think it's improbable in a 12-month time horizon," said Williams. "I don't think the Gulf states are yet persuaded by the arguments in favour of change.
"They are expecting a dollar recovery in the second half of the year to ease some of them pressures they have faced as a consequence of weakness over the last couple of years."
Investors piled into Gulf currencies from September on speculation that some of the states in the world's biggest oil-exporting region would follow Kuwait and sever their links to a dollar that was tumbling to record lows against the euro and other major global currencies.
"The US treasury in its report mentioned the Middle East and it has mentioned the GCC countries in particular," said Maratheftis, cautioning against over-excitement in the region’s markets.
"What people have failed to realise is that there regular publications of this report - the previous report was published in December last year and they said exactly the same thing."
Outside the region, Maratheftis perceived a Gulf depeg from the dollar could positively impact the greenback.
"I think the impact on the dollar would prove to be positive," he said. "Maybe initially there might be some negative sentiment and it might put the dollar under some moderate pressure, but I think this will be short-term."
Marios said that global economic imbalances were the main reason behind the dollar’s fall in the past seven years.
"Now we're seeing global unbalances widening as we speak, and I think stronger Middle East currencies will help deal with these global imbalances," he said.
'We have massive current account surpluses here [in the Gulf]. A stronger currency would help with the unwinding of these global imbalances and should hence be a positive for the dollar over the medium-term."
by Talal Malik on Monday, 26 May 2008
POSITIVE MOVE: Gulf states depegging their currencies from the US dolar would be a boon for the region, analysts said. (Getty Images)Gulf states looking at depegging or revaluing their currencies will find the impact is largely positive for the economy, senior economists told ArabianBusiness.com on Monday.
US investment bank Merrill Lynch said on Sunday that the UAE and Qatar would probably depeg from the US dollar and move to a currency basket in the next few months, after the US gave the go-ahead in order to fight inflation.
All Gulf states, bar Kuwait, peg their currencies to the dollar, which forces central banks to follow US monetary policy and limits their ability to bring down inflation, which has soared to record highs across the Gulf.
"I think there would very few losers from an adjustment because the region is so import-dependent and because such a large proportion of the population is expatriate and remitting much of their income," said Simon Williams, a Dubai-based economist at HSBC.
"Overall, I think it will be positive if we see any kind of monetary policy tightening," said Marios Maratheftis, regional head of research at Standard Chartered.
"If something is better for the economy as a whole, it's better in general for all."
Merrill Lynch said in their report 'US Green Light for the GCC' that whilst the UAE and Qatar would make the currency-basket move in the next few months, Saudi Arabia was unlikely to follow until late next year.
Citing a US Treasury report on the GCC, the investment bank said the US government had become more confident about the outlook for the dollar and therefore did not necessarily need Gulf support for its currency.
"We believe the inclusion effectively gives the GCC countries the green light for change," the bank said.
However, regional economists are divided over both whether and when any of the Gulf states will either revalue their currencies or drop the dollar-peg.
"Our view has always been consistently that the region is in need of monetary policy tightening in order to manage the [economic] boom more effectively," said Maratheftis about Standard Chartered's position on Gulf currencies.
"The challenges we're facing in the region are different to the challenges that the US economy is facing. Monetary policy is extremely loose which is leading to inflationary pressures.
"We think the best way of dealing with inflationary pressures is by changing the dollar-peg ideally. This would be the best solution but as the second-best solution we think a revaluation would also help."
Others said that neither the UAE nor Qatar were likely to move to a basket of currencies in the next few months.
"I think it's improbable in a 12-month time horizon," said Williams. "I don't think the Gulf states are yet persuaded by the arguments in favour of change.
"They are expecting a dollar recovery in the second half of the year to ease some of them pressures they have faced as a consequence of weakness over the last couple of years."
Investors piled into Gulf currencies from September on speculation that some of the states in the world's biggest oil-exporting region would follow Kuwait and sever their links to a dollar that was tumbling to record lows against the euro and other major global currencies.
"The US treasury in its report mentioned the Middle East and it has mentioned the GCC countries in particular," said Maratheftis, cautioning against over-excitement in the region’s markets.
"What people have failed to realise is that there regular publications of this report - the previous report was published in December last year and they said exactly the same thing."
Outside the region, Maratheftis perceived a Gulf depeg from the dollar could positively impact the greenback.
"I think the impact on the dollar would prove to be positive," he said. "Maybe initially there might be some negative sentiment and it might put the dollar under some moderate pressure, but I think this will be short-term."
Marios said that global economic imbalances were the main reason behind the dollar’s fall in the past seven years.
"Now we're seeing global unbalances widening as we speak, and I think stronger Middle East currencies will help deal with these global imbalances," he said.
'We have massive current account surpluses here [in the Gulf]. A stronger currency would help with the unwinding of these global imbalances and should hence be a positive for the dollar over the medium-term."
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