As dollar weakens, Gulf nations look at currency pegs

Matthew Brown and Aaron Pan
Bloomberg
Tuesday November 20, 2007

DUBAI: When central bank officials in the Middle East say they have no plans to end their fixed exchange rates to the dollar, the currency market hears the opposite.

Merrill Lynch predicts that either the United Arab Emirates or Qatar will cut their dollar peg within six months. Standard Chartered says the six Gulf Cooperation Council nations need to raise the value of their currencies 20 percent. And currency traders are betting that Saudi Arabia will sever its 21-year link to the dollar, according to data compiled by Bloomberg.

"The dollar peg is doomed," said Jim Rogers, chairman of Rogers Holdings in New York and a former partner of the hedge fund manager George Soros.

The Gulf countries, which supply 22 percent of the world's oil, according to BP, are under pressure to abandon their fixed exchange rates after the dollar tumbled 10 percent against the euro so far this year. Inflation in the Gulf region is accelerating at the fastest pace in at least five years because central banks follow U.S. Federal Reserve policy as a result of the dollar link.

The ties are already weakening. Kuwait dropped the dinar's fixed exchange rate in May and the currency has strengthened 4.5 percent.

Full article here.