Gulf States to End Dollar Peg

Earlier this week, we reported that the members of OPEC are mulling the possibility of pricing oil contracts in a basket of currencies, rather than solely in Dollars.  In a related move, the members of the Gulf Co-operation Council (GCC) are also rethinking their exchange rate policies. Currently, the members of the GCC, consisting of United Arab Emirates (UAE), Saudi Arabia, Kuwait, Qatar, Oman and Bahrain, all currently peg their respective currencies to the Dollar, in some form or another.  However, this policy is being scrutinized as a result of the falling Dollar, which has dragged down GCC currencies proportionately and triggered double-digit inflation.

In fact, Kuwait has already de-linked its currency from the USD and instead pegged it to a basket of currencies, so as to give it more flexibility in conducting monetary policy.  This represents the most likely course for the rest of the GCC, since it would allow them to maintain exchange rate stability while increasing their flexibility in conducting monetary policy.  This policy change, combined with the potential switch in oil pricing among OPEC nations, bodes ill for the Dollar. At the very least, it would result in decreased demand for USD and for Dollar-denominated assets. At worst, it would result in active diversification, of rotating foreign exchange reserves into assets denominated in other currencies, to support the new peg.

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