| Kippreport.com

Gulf currency pegs seen surviving weak dollar for now

November 23, 2010 12:11 by Reuters

However, the euro, at around $1.3740 on Monday, has lost ground to the dollar on worries about how the currency bloc can manage the problems of its weaker economies. Meanwhile, oil prices have cooled down after climbing to a two-year high of nearly $89 a barrel this month with 2008 peaks still distant.

Another factor limiting pressure on the dollar pegs is that the capital flows spurred by U.S. monetary policy have largely bypassed Gulf economies trying to recover from the global credit crunch and local debt woes.

“We have not seen any significant plays from any of the hedge funds or real money guys out of Europe or America for the last month,” said Lyndon Loos, head of MENA forex trading at Standard Chartered in Dubai. “If you get to double digits on the inflation side and see significant weakening in the dollar, say the euro above the 1.55 area, than pressure will be applied once again,” he said.

WEAK LENDING CURBS PRICES

But unlike in 2008, inflation mostly holds in low single digits in the Gulf, where banks exposed to debt restructuring are reluctant to lend.

“Even with the current phase of dollar weakness, a return to such levels of inflation is unlikely through to the end of 2011,” said John Sfakianakis, Banque Saudi Fransi’s chief economist.

Analysts forecast Saudi inflation at 5.3 percent on average this year and 5.1 percent next year, the highest in the Gulf but well below a 11.1 percent record high in July 2008.

In the longer term, a move away from oil may change attitudes in the region, which is attempting to form a euro zone-like monetary union. But given traditional conservatism on policy change, combined with relatively weak inflationary pressures, the dollar pegs may well remain for some time.

“This state of affairs should continue for a few more years — even though increasing diversification of its (UAE) economy, especially towards financial business, will increasingly warrant a switch to flexible exchange rates,” Mohammad Ishfaq, lead economist at Dubai Department of Finance, wrote in a research paper earlier this year.

(By Martin Dokoupil. Editing by Ruth Pitchford)

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