Delinking the dirham from the dollar is currently ruled out

[AltinD]

Originally Posted by Hollie Maea

That's what I thought. Last time I was there it was that way but I wasn't sure if it had changed since then.

So you've visited the country, that's why the interest and knowledge. I left in 1998 and since then never been for more then 3 - 4 weeks a year.

[Hollie Maea]

Originally Posted by AltinD

So you've visited the country, that's why the interest and knowledge. I left in 1998 and since then never been for more then 3 - 4 weeks a year.

I was there a couple of years ago, visiting family friends. I found it to be quite a beautiful country, both in terms of the landscape and in terms of these sisters in the family we were visiting

[DUBAI]

I dont like the word 'delinking'.

I would say its not even a word, but in this day and age...

[rexdmx]

Published: 24/05/2007 12:00 AM (UAE)

Shroud of doubt cloaks Gulf monetary union
By Babu Das Augustine, Banking Editor



Dubai: Ambiguity about the viability of a Gulf monetary union and the region's ability to meet the 2010 deadline has deepened after Kuwait and Oman opted for independent monetary policies.

Oman yesterday made it clear the Gulf state was not ready to surrender its monetary policy independence in favour of a common Gulf currency.

Speaking at a banking conference in Kuwait, Oman's Central Bank Governor Homud Al Zidjali said the country had decided not to take part in union.

"Our decision is not to participate in the Gulf monetary union because we do not want to restrict our monetary and fiscal policies at present," he said.


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Although the UAE government and the Central Bank have reaffirmed the country's commitment to the dirham-dollar peg, His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, said in Seoul on Wednesday the UAE was studying the region's plan to adopt a single currency.

"If we see that the currency will negatively affect our economy, we will have reservations about it," he said. Analysts say there is a strong indication that Gulf governments are yet to reach a consensus on the 2010 deadline.

Growing uncertainty

"We did not think the single currency was feasible by 2010. Statements from governments also point to the growing uncertainty," said Steve Brice, an econ-omist with Standard Chartered.

Oman believes restrictions on monetary policy will have a negative impact on its development plan. It was the first Gulf state to express its reservations about the 2010 deadline.

The country has also cited its inability to meet legislative and technical requirements for monetary union by the deadline.

"At present we will not join. Later when the single currency comes into existence, then maybe," said Al Zidjali.

Meanwhile, central bank governors of the UAE, Bahrain and Saudi Arabia defended the viability of the deadline and their commitment to the dollar peg yesterday, while their Kuwaiti counterpart insisted his country was still committed to the common currency.

[rexdmx]

Published: 24/05/2007 12:00 AM (UAE)

Decision on dollar peg gets mixed reaction
By Babu Das Augustine, Banking Editor



Dubai: The UAE government's decision to maintain the dirham's peg to the dollar has created mixed reactions among the banking and business community in the UAE.

His Highness Shaikh Mohammad bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, told reporters in Seoul on Monday that that the government has not discussed a change (in the peg).

The UAE central bank governor also insisted that the UAE is committed to keep its peg to the dollar unchanged.

In recent years the dir-ham and other Gulf currencies have declined against the euro, sterling and a host of Asian currencies, prompting calls to revalue the region's currencies.

Following Kuwait's decision to de-link its currency from the dollar, there has been widespread speculation that the UAE will revalue its currency.


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However, there are analysts who believe that an appreciation of GCC currencies would likely to have an overall negative fiscal effect.

According to a recent report by Moody's Investor Services, the bulk of Gulf governments' receipts are derived from hydrocarbon exports that are priced in US dollars at international market rates.

Hence, an appreciation would lower the value of these receipts in local currency terms. In addition, an appreciation in local currencies could negatively affect the balance of payments situation, as the non-hydrocarbon exports of goods and services could be retarded.

"The UAE is benefiting from a weaker dollar as it makes the country a cheaper tourist destination while making exports from UAE very competitive," said Sultan Nasser Al Suwaidi, Governor of the UAE central bank.

"The chances of revaluation of the dirham have diminished. Although the share of imported inflation is small in the UAE, the impact of the declining dollar will continue to affect the purchasing power of the dirham," said Steve Brice, economist with Standard Chartered.

"People have been expecting a revaluation of the dirham to compensate for the decline in its purchasing power. While the country keeps its peg there is always the option to revalue the currency within the peg to alleviate the exchange rate losses suffered by people who are doing business and earnings in dirhams and saving or spending in other currencies," Khalid Maniar, Managing Partner, AGNMAK Accountants and Business Advisors.

"There has always been a strong case for revaluation in the Gulf countries. But ultimately it is the governments and the central banks that have the final say," Ekart Woertz, Programme Manager, Econ-omics at Gulf Research Centre.

[rexdmx]

Published: 27/05/2007 12:00 AM (UAE)

Decision to end dollar peg understandable
Dr Jasim Ali, Special to Gulf News



Kuwait's decision to end the dinar-dollar peg is quite understandable.

The authorities have now decided to link the dinar to a basket of currencies, including the dollar.

The idea is to provide weighted average to diverse currencies based on their significance to the country's international trade. Nevertheless, the dollar will remain a key component of the new practice, as the greenback plays an important part in Kuwait's trade, notably exports of petroleum products.

The authorities made the move as part of efforts to contain decline in the value of the dollar. The steady decline in dollar's value against major currencies such as euro and yen benefits the US by making American exports less costly and hence more attractive. The US had an extraordinary trade deficit - a hefty $232 billion with China alone - in 2006.


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The weakening of the dollar is meant to help correct the imbalance by making American goods cheaper abroad.

Undoubtedly, decline of the dollar makes imports not denominated in the US dollar only more expensive. The weakening of the dollar naturally reduces value of the linked currency versus appreciating currencies. Hence, Kuwait had to pay more to acquire products from the European Union and Japan. Business with Europe and Asia amounts to a sizable chunk of Kuwait's imports. In effect, this amounted to importing inflation.

According to the International Monetary Fund (IMF), currencies of the six-nation Gulf Cooperation Council lost more than 12 per cent of their real values in the period 2003 to 2006. The IMF attributed this to the decline of the dollar against other major currencies.

In fact, the recent Kuwaiti decision was not the first of its kind to counterbalance the drop in the value of the dollar.

In 2006, monetary officials revalued the dinar by one per cent, requiring payment of 287 fils rather than 290 fils to buy one dollar.

The Kuwaiti authorities partly attributed the move to fears of importing inflation. This is related to the weakening of the US dollar against major currencies such as the euro and yen. Still, the link to the dollar results in adoption of interest rates prevailing in the US.

In effect, countries linking their currencies to the dollar must import prevailing interest rates in the US market in order to discourage what is known as arbitrage, or taking advantage of different interest rates of linked currencies.

In other words, interest rates in currencies pegged to the dollar must move in the same direction as those of the US in order to deny investors the opportunity of assuming no risk.

Arguably, it is premature to assert that the Kuwaiti move would undermine GCC efforts to have a monetary union by 2010. Unlike Oman, Kuwait has not announced any plans to pull out of the planned union.

Still, GCC states have a long way to go prior to implementing the single currency scheme.

Member states must first implement customs union and a common market. The customs union is concerned with adopting unified external trade policy with non-members while a common market relates to allowing unrestricted movements for factors of production.

If all goes according to schedule, GCC countries should complete the requirements of a customs union by the year-end and start implementing the common market principles by the start of 2008.

However, delays are expected due to diverse economic challenges facing individual nations.

Still, the Kuwaiti initiative move may end up as a model for the planned monetary union.

The writer is a Member of Parliament in Bahrain.

[glover]

Published: 28/05/2007 12:00 AM

Reuters

Kuwait City: Kuwait moved yesterday to deter investors betting it would allow its dinar to appreciate after a currency policy shift last week, by closing a window banks used to lend short-term funds to the central bank.

A week after the oil exporter allowed its currency to rise against the US dollar, the central bank suspended the use of its one-month intervention rate, pushing more dinars on to the interbank market.

The intervention rate will not be used "until further notice," a central bank official, who declined to be identified, said.

The central bank gave no reason for the move.

The intervention rate was the main instrument through which the central bank took in short-term dinar deposits from banks in Kuwait.

By taking itself out of the market, the central bank forced banks to trade among themselves to place short-term funds, dampening demand for dinars.

The one-month Kuwait inter-bank offered rate fell to 5.1875 per cent yesterday from 5.2500 the previous day, central bank data showed.

"The central bank has indicated that it would take necessary measures to make sure speculators don't benefit and this may stop any new inflows," said Randa Azar-Khoury, chief economist at National Bank of Kuwait.

"But this will hurt banks which need to invest excess liquidity."

Kuwait dropped its peg to the dollar last week and adopted a basket of currencies, allowing the dinar to appreciate 0.37 per cent against the dollar.

The central bank has held the dinar at $0.28806 since the May 20 policy shift despite speculation the appreciation was the first of many moves.

Kuwait broke ranks with Saudi Arabia and four other Gulf oil producers, which had pegged their currencies to the dollar to prepare for monetary union in 2010.

Kuwait's central bank said the dollar's slide over the past year was driving up inflation by making some imports more expensive.

[Morrismarina]

I'm not sure why the Kuwait's have done this. Surely now they've pegged the rate to a basket of currencies they won't benefit as much from any appreciation of the dollar which is sure to happen in the next year or so -they could find their currency worth less than they would want in a few years time.

[sameerl]

I think the reason behind the move is to eventually develop your own monetary policy; having a depreciating dollar is not helping the GCC countries (as is being evidenced by the daily deluge of articles deploring the spiraling cost of living). Likewise, you can envisage scenarios whereby an appreciating US dolllar can ben detrimental as well (helps export earnings, but domestic industry may suffer on account of possibly high and rising interest rates).
An independent monetary policy allows the central bank to make judement calls as to what direction suits its domestic economy the best. As i stated earlier, it is perhaps the best indicator of a maturing economy. Kuwait's move is a step in this direction.

[cyborg81]

if the uae and other gulf states follow to delink their currencies from the dollar,the u.s military in the gulf would "gently" remind them not to do so with a small "shock and awe".

[glover]

Gulf News
Published: 02/06/2007 12:00 AM (UAE)
Reuters

Riyadh: Saudi Arabia's currency peg to the weak dollar has had little impact on inflation in the world's top oil exporter, the central bank chief said, moving to end market speculation about a shift in exchange rate policy.

Saudi inflation could be driven by factors such as state spending and property prices, Hamad Saud Al Sayyari said in a television interview aired on Thursday, almost two weeks after neighbouring Kuwait let its currency rise against the dollar.

Sayyari, governor of the Saudi Arabia Monetary Agency (Sama), said the kingdom paid for less than 25 per cent of its exports in currencies other than the dollar and the riyal. "One of the important factors that can have an impact on inflation is the rise in public spending," Sayyari said on state-run Saudi Channel 1.

"It's important to coordinate monetary policy and government spending to limit the impact on inflation and that is always available through continued dialogue with the finance ministry," he said.

Finance Minister Ebrahim Al Assaf said this month that Saudi Arabia planned to control government spending to try to limit inflation.

Kuwait cited imported inflation as the reason for its May 20 decision to drop the peg to the dollar, which hit a record low against the euro in April, and switch to a basket of currencies.

That allowed the Kuwaiti dinar to rise 0.37 per cent against the dollar, throwing into disarray plans for monetary union in 2010 with Saudi Arabia and four other Gulf Arab oil producers.

Kuwait's move fuelled market speculation that the others in the region could follow to contain the rising cost of imports from Europe and some Asian countries. Saudi Arabia and the other four states - the UAE, Qatar, Oman and Bahrain - have ruled out changing exchange rate policy that was meant to prepare the region for a single currency.

Any appreciation of the Saudi riyal would reduce local currency revenue from dollar-denominated oil exports. While that may not be a concern in smaller countries such as Kuwait, it could sway policy in Saudi Arabia, where public debt topped 100 per cent of gross domestic product during a spell of low oil prices in the 1990s.

Saudi Arabia, the region's strongest advocate of dollar-pegged exchange rates, has a much lower inflation rate than some other Gulf states.

Saudi inflation fell to 2.86 per cent at the end of March from three per cent in February and Sayyari said he expected it to fall further in April and May.

Qatar's inflation rate hit a record 15 per cent at the end of March, while Kuwait's was 5.15 per cent.

Sayyari said the widely varying inflation rates in countries with dollar pegs showed exchange rates were not to blame for price rises. "This proves that the causes of inflation are local," he said.

[sameerl]

A Morgan Stanley report issued (Khaleej Times Report on Friday) states thier chief economist for the Gulf stating that the case for revaluation is becoming more compelling and inevitable with every day

[glover]

did you read MEED's new report about real estate crash speculation in Dubai. it's in the Crash thread. concludes that there will be no crash, only a softening of the real estate market, which price-wise means prices will go sideways!!

[sameerl]

I did read it. Compelling analysis from MEED staff; but offers varying reports (ncluding from Brice of Standard Chartered bank). There will always be multiple ways to look at the same (or similar) data (as is the case with this thread title as well). Thats what makes a market. In 1999-2000, there were many analysts who stated that the Nasdaq still had room to go higher. 7 years later, and its still at half the value of its peak in 2000. Likewise, those who have been pessimistic thus far about Dubai have been proven unequivically wrong.

[Morrismarina]

Originally Posted by cyborg81

if the uae and other gulf states follow to delink their currencies from the dollar,the u.s military in the gulf would "gently" remind them not to do so with a small "shock and awe".

I'm bracing myself for the partial bombing of Kuwait in the next few days then

[glover]

yeah, some people just get blinded by their anti-americanism!

[sameerl]

I wonder if you read the interview of SAMA's governor, who stated that SAMA may not follow any future moves of the Federal Reserve. Whilst his language was noncommital (as expected) it signals yet another shift in thinking about the peg.

S&P is also out with a report hailing Kuwait's move and stating that other Gulf states should follow

[rexdmx]

Dollar fades as reserve currency
By Babu Das Augustine, Banking Editor



Dubai: The dollar is fast losing its charm as a reserve currency due to its persistent weakness against the euro and a host of other international currencies, according to a report by the National Bank of Dubai.

"The dollar versus euro exchange rate has fluctuated since the launch of the euro, but recent weakening of the dollar will increase the euro's global role as a preferred currency at the expense of the dollar and the yen," the report said.

The NBD report comes in the wake of a recent sharp decline of the dollar against the euro and sterling and the raging debate about whether GCC states should abandon their currency pegs against the dollar. Last month, Kuwait decided to de-link its currency from the dollar.


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While all GCC central banks are insisting they will continue to peg their currencies to the dollar until they achieve monetary union in 2010, economists and international rating agencies said maintaining the peg would be expensive, and the monetary union target is unrealistic and lacks economic logic.

Calling for flexible exchange rates in the Gulf, Serhan Cevic, an econ-omist with Morgan Stanley, said recently that the case for currency revaluation (in the GCC) is growing stronger.

In its recent report, international rating agency Standard and Poor's said sticking to the currency peg for the sake of monetary union alone lacks economic logic as a flexible exchange rate regime is likely to deliver better value to the Gulf states.

"We believe that its (monetary union's) importance from an economic perspective has always been limited," the S&P report said.

In the context of the continuing slide of the dollar, S&P said Kuwait's decision to abandon its dollar peg would have a positive impact on the country's inflation.

"The extent to which the re-pegging of the dinar will reduce inflationary pressures in Kuwait over the long-term will depend, in part, upon the composition of the new basket, and thus on the extent to which the dinar is de-linked from the continued slide of the dollar going forward," said Luc Marchand, credit analyst at Standard & Poor's Ratings Services.

Currently, one-third of countries that peg their currency in one form or another use the euro as their anchor currency. Last year, dollar-denominated foreign exchange reserves comprised almost two-thirds of total world holdings of official foreign exchange reserves; euro-denominated reserves comprised one-fourth of the total whereas yen- and sterling-denominated reserves together comprised only 7 per cent.

In private transactions too, the euro has surpassed the dollar as the most important currency of issue for international bonds and notes.

[glover]

Originally Posted by sameerl

I wonder if you read the interview of SAMA's governor, who stated that SAMA may not follow any future moves of the Federal Reserve. Whilst his language was noncommital (as expected) it signals yet another shift in thinking about the peg.

S&P is also out with a report hailing Kuwait's move and stating that other Gulf states should follow

it looks like there is a consensus among economists out there that a basket of currencies is the way to go for the GCC countries, not so much so because it's the best way to fight inflation, but for the flexibility it provides. However, the UAE, it seems, believes that currency stability at this stage overrides all other concerns. they are worried, like the Chinese and the Indians, that a rising currency could wreck the economy, like it did in Japan in the 80s!

There is also the argument that the dollar has bottomed out!

[sameerl]

If you see the monthly report on Gulf news that tracks the prices of essential commodities (pulses, meat, fruits and vegetables) in Dubai and Abu Dhabi, you will see that prices have risen by over 20% on a year on year basis. This is further evidence that the monetary authorities are in denial when it comes to inflation and its sources..