Pegged to the right stuff
More losses hammer markets around the world today, but there’s a silver lining to all this: because the GCC’s currencies are pegged to the dollar, the rising dollarhas just increased your salary’s worth.
October 28, 2008 10:32 by kippreport
After weeks of soul-destroying news about the state of world economies, there’s a single positive that could makes all the difference to expatriates living in the GCC: while currencies around the world are falling, the value of US dollar is rising. As of today, the Australian dollar has fallen by 25 percent and the UK pound by 16 percent against the US dollar. As the dollar rises and other currencies fall, the value of your salary inflates.
This summer, GCC nations (with the exception of Kuwait, which is pegged to a currency basket) discussed the possibility of depegging from the dollar in order to help reduce national inflation rates and to take steps toward creating a monetary union. Nothing came of them, which is good news for all of us, especially for those who repatriate their salaries every month.
The shift in currency value is largely due to the sudden end of currency carry trades, whereby investors borrow money from nations with low interest rates and lend the funds to nations with high interest rates. It’s a common, but risky practice. When the markets are strong, currency carry trades can be very profitable. But during bad times, like now, they could wipe out investments.
While carry trades haven’t stopped altogether, they have slowed down considerably. Consequently, global markets may experience a currency rebalance where the dollar regains the strength it enjoyed in the past.
Again, that’s good news for us…for now.