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Death of the dollar
The sliding dollar has prompted the region’s governments to question if their currencies’ dollar peg is doing more harm than good (again).
November 16, 2009 9:32 by Jay Akasie
Gulf nations are taking notice. If Kuwait isn’t the most prescient country in the Gulf, it’s at the very least the luckiest. That’s because in May of 2007, Kuwait de-pegged the dinar from the dollar in favor of a weighted basket of currencies.
To be sure, the initial switch wasn’t without pain. During the first year of the new denomination, Kuwait’s oil revenues fell KD790 million ($2.8 billion) because the world’s oil income is calculated in dollars.
But there’s an opportunity cost that comes with every bold move. Although Kuwait’s basket of currencies appears to be dominated by the dollar, it’s all the more distant from the perilous economic policies of the current American president. Such distance translates into a lesser threat of inflation for that Gulf country.
Other nations of the Gulf Cooperation Council in October began suggesting the possibility of following Kuwait’s lead. After a report surfaced that there were secret plans to take Bahrain’s dinar off the dollar peg, a government minister hastily came forward with an official denial.
According to economists at the investment bank EFG-Hermes, the currency reform debate could once again reemerge down the line, if there is a sustained weakness in the dollar and a desire for greater monetary policy flexibility. For the near term, the recent fall in the inflation level in the Gulf will keep the discussions on de-pegging more muted.