Delinking the dirham from the dollar is currently ruled out

[rexdmx]

i read today that the low dollar was an excuse for the OPEC to leave the oil prices high.

[NEWUSER]

true...

[rexdmx]

Dollar gains on global credit jitters and solid GDP reading
Special to Gulf News
Published: July 28, 2007, 23:03


US subprime mortgage and credit market woes continued to spook the markets as investors scrambled to cut their exposure to risky assets worldwide and put money in safe-haven US government bonds.

The dollar rallied sharply against a basket of major currencies even as world stock markets fell on increased risk aversion. Markets await the US nonfarm payrolls data and Bank of England rate announcement this week.

Euro

Last week commenced with the euro broadly steady against the dollar near record highs, on the back of market concerns that the US subprime mortgage market weakness may spill over to the wider US economy.

As the week progressed, the dollar rebounded against the euro, benefiting from increased risk aversion as investors tried to assess whether the US housing market contagion was spreading.


--------------------------------------------------------------------------------


--------------------------------------------------------------------------------


In mid-week, the dollar inched up further, ignoring the weak US home sales data and the euro posted its biggest daily fall against dollar in percentage terms since January.

Meanwhile, a slight fall in the German Ifo business climate index did little to alter market expectations for a further euro zone rate hike in the coming months.

As the week ended, a wave of risk aversion swept across financial markets as investors worried about instability in world credit markets, dragging stocks sharply lower and raising the demand for safe haven government bonds.

As investors cut their exposure to riskier foreign stocks and repatriated funds from overseas, the euro fell more than two cents against the dollar from record highs and the dollar appreciated by almost one per cent on the week against a basket of six major currencies.

The dollar was also lifted by the US Commerce Department's announcement on Friday that the US second quarter GDP grew at an annual rate of 3.4 per cent, more than an expected 3.2 per cent.

Last week's range: $1.3626-$1.3852 (Dh5.0048- Dh5.0878)

Range for this week: $1.3500-$1.3800 (Dh4.9586 -Dh5.0687)

Yen

The yen started the week at around six-week highs against the US currency and rallied to a 2-1/2 month high as US housing market worries continued to weigh the dollar down.

As the week progressed, a fall in the Asian stock indices also prompted investors to cut down on the risky carry trades, where investors sell low yielding currencies like the yen to purchase higher yielding assets and currencies like the euro and sterling.

Tokyo's Nikkei share average hit a six-week low on Wednesday, a day after US stock indices fell nearly 2 per cent on US subprime mortgage concerns. Markets ignored comments by Bank of Japan board member Tadao Noda that the BoJ needs to be convinced about economic and price conditions before deciding whether to raise interest rates.

As the week ended, the yen consolidated its position against major currencies, rallying one per cent against sterling and the New Zealand dollar, currencies that had acted as popular targets for carry trades.

In other news of interest, International Monetary Fund (IMF) chief Rodrigo de Rato said that greater exchange rate flexibility from China would also allow other Asian countries to let their currencies appreciate with less concern about export competitiveness.

In local news of interest, the Kuwait Central Bank allowed the dinar to appreciate around 1.7 per cent against the dollar on Wed-nesday before devaluing it 0.11 per cent the next day.

Last week's range: 118.14 to 121.62 yen (Dh0.030201-Dh0.031090)

Range for this week: 117.00 yen-120.00 yen (Dh0.030608-Dh0.031393)

Sterling

Sterling commenced the week hitting a fresh 26-year high against the dollar, taking advantage of broad dollar weakness and expectations of British interest rates to rise further this year.

British interest rates of 5.75 per cent are already the highest among the G-7 countries.

However the UK currency came off the highs as the week progressed, as investors wondered whether weakness in the troubled US credit and housing sectors could spread to other countries and economies.

As the week ended, sterling eased further against the dollar and euro after lower-than-expected UK July home sales figures which was perceived by markets as a sign of further slowdown in the UK housing market.

The pound ended the week sharply lower against the dollar, engulfed in the wave of risk aversion sweeping the financial markets.

Last week's range: $2.0229-$2.0655 (Dh7.4301-Dh7.5866)

Range for this week: $2.0100-$2.0400 (Dh7.3827-Dh7.4929)

- HSBC Global Markets Middle East

[rexdmx]

Kuwait April inflation up to 5.37%
Reuters
Published: July 28, 2007, 23:03


Kuwait City: Kuwait's annual consumer price inflation rose to 5.37 per cent in April from 5.15 per cent in March, driven by higher prices for food, clothing, housing and transport, government data showed yesterday.

The All Items Consumer Price Index rose to 115.8 points on April 30 compared with 109.9 points on April 30 last year, according to data obtained by Reuters.


--------------------------------------------------------------------------------

[rexdmx]

Economy caught in inflation bind
Gulf News
Published: July 30, 2007, 23:49


The UAE economy, moving on a high-speed growth trajectory, is getting caught up in the classic growth versus inflation dilemma.

While inflation in the UAE is largely a by-product of excess liquidity, increased government and private spending and the relative supply constraints in the real estate sector, the dirham's peg to the perennially falling dollar is also contributing to the general rise in prices.

Independent economists and the UAE Central Bank have always attributed surging rents as a major contributing inflationary factor. However, rising rents have also been widely acknowledged as a driver behind the real estate boom.

The UAE Ministry of Economy has estimated inflation at 9.3 per cent last year. With the new supply of homes coming into the market this year inflation was expected to ease to about 7.5 per cent.

However, with the surging cost of living and shrinking purchasing power, new supply alone is unlikely to cool inflation. In the absence of any kind of inflation targeting through fiscal or monetary policy measures, it would be unrealistic to expect prices to retreat in the near term.

But if the market is left to find its own tolerance level for too long, it will almost certainly bring down prices but at a huge cost in the form of a severe correction starting in the real estate sector, with cascading effect on other sectors.

The real estate sector is already seeing the omens on the horizon in the form of declining demand for newer properties from domestic buyers.

[sameerl]

Although its too early to gauge the impact on Kuwait's economy from the currency revaluation, important insights are to be had from the way it is operating the peg:

1) A frequent adjustment to the peg (yesterday it allowed the currency to appreciate by 0.16%) suggests that it is a managed float regime, akin to China. The Chinese model has worked well thus far, although it is inevitable that China will have to accelearte their pace of revaluation

2) Not revaling the basket of currencies has kept speculators at bay. Although the basket can be inferred indirectly, not revealing its components has let the central bank operate thus far with a high degree of autonomy.

3) Excess liquidity is starting to be drained. A fixed peg implies that the central bank is standing on both sides of the equation by supplyling a potentially infinite amount of money to satiate demand and supply. A fluctuating peg not only alters demand but reduces the flow of liquidity that is constantly being generated (largely due to rising oil and gas prices). This will further dampen inflation

For the UAE, it almost certainly implies that the central bank is monitoring the situation closely, even as the Ministry of Econom struggles in vain to control spiraling costs at the consumer level. (water being the latest example where the price rise has been rejected for the moment)

[rexdmx]

High inflation to slow down Gulf states' real GDP growth
By Babu Das Augustine, Banking Editor
Published: August 02, 2007, 00:33


Dubai: Galloping inflation is expected to slow the real GDP growth of the Gulf states, particularly the UAE and Qatar, the National Bank of Dubai (NBD) said in a report yesterday.

"High inflation is adversely affecting the competitiveness of the GCC economies and hampering the diversification of the economies due to difficulties in attracting foreign direct investment," the report said.

Inflation is increasing the cost of living in the GCC more so in the UAE and Qatar. According to a recent survey by Mercer Human Resources, Dubai was the world's 25th (from 73rd position in 2005) most expensive city in 2006, out of 144 cities surveyed.

Earlier this year, the IMF warned of inflation limiting the economic diversification efforts in the region.


--------------------------------------------------------------------------------


--------------------------------------------------------------------------------


"The unprecedented economic boom driven by oil revenues and the recycling of regional liquidity has seen the Gulf's GDPs racing at a close pace with some of the Asian GDP growth rates. But inflation is becoming a major limiting factor," Mohsin S. Khan, Director Middle East and Central Asia Department, told Gulf News in May.

Sectors that are targeted for diversification such as tourism and financial services are likely to become less competitive.

According to the report, while many small businesses may close down because of the high cost of doing business, skilled expatriates that constitute the majority of the work force might leave the region because of the increasing cost of living.

Economic fundamentals of the Gulf states suggest that the region will have to live with increasing inflationary pressure in the years ahead, NBD said.

The growing inflation in the region is driven by factors such as high liquidity, low interest rates (negative real interest in Qatar and the UAE), expansionary government spending and strong money supply growth.

In addition, there are other factors such as currencies' peg to the dollar in the context of depreciation of the US dollar against other major currencies and skyrocketing rents that contribute to the region's inflation.

[rexdmx]

welcome back...where have u been??

Originally Posted by sameerl

Although its too early to gauge the impact on Kuwait's economy from the currency revaluation, important insights are to be had from the way it is operating the peg:

1) A frequent adjustment to the peg (yesterday it allowed the currency to appreciate by 0.16%) suggests that it is a managed float regime, akin to China. The Chinese model has worked well thus far, although it is inevitable that China will have to accelearte their pace of revaluation

2) Not revaling the basket of currencies has kept speculators at bay. Although the basket can be inferred indirectly, not revealing its components has let the central bank operate thus far with a high degree of autonomy.

3) Excess liquidity is starting to be drained. A fixed peg implies that the central bank is standing on both sides of the equation by supplyling a potentially infinite amount of money to satiate demand and supply. A fluctuating peg not only alters demand but reduces the flow of liquidity that is constantly being generated (largely due to rising oil and gas prices). This will further dampen inflation

For the UAE, it almost certainly implies that the central bank is monitoring the situation closely, even as the Ministry of Econom struggles in vain to control spiraling costs at the consumer level. (water being the latest example where the price rise has been rejected for the moment)

[sameerl]

Thanks. Was on a business trip throughout the region

[glover]

(this is the second report that comes out in less than 2 weeks forecasting a drop in inflation this year, the frst was by IMF)

Khaleej Times Online

BY HASEEB HAIDER

2 August 2007

ABU DHABI — UAE inflation could ease out to 7-8 per cent, but not within the five per cent target set by the government for 2007, says a Citigroup report.

The report prepared by Citi Research, a division of Citigroup Global Markets, titled 'Economic and Market analysis of Emerging Markets', has reviewed global emerging economies. The report termed 9.3 per cent inflation in 2006, as an under-estimate.

The report ruled out the UAE revaluing the US dollar peg.

It said that strong oil prices will keep boosting Dubai, as it continues to attract regional surpluses.

Oil prices have reached record highs in 2007. In its comment on the key issue facing residents of Dubai — soaring rents, it said that the rental cap may not work as expected, as delay in new housing units coming on to the market means rental pressures will remain.

The Gulf region will remain tense, which is one reason why there is so much interest in Dubai as a safe haven.

On Kuwait, the Citibank report said as expected,Kuwait was the first to revalue its peg, and has adjusted three times since mid-May. This comes to a 2.5 per cent appreciation.

Though Kuwait has surprised the market by the magnitude of the last adjustment, it reduces the chances of any further adjustments unless the dollar continues to lose ground against the euro.

Inflation should edge down, aided by another revaluation of the Kuwaiti dinar. On fast growing Indian economy, the report said that strong trends in industry and services are likely to sustain growth. Other growth drivers —investment, consumption and outsourcing remain on track.

Strong savings, investment and key growth drivers support the GDP forecast for FY08. But the risk is on the downside with policy tightening.

Solid consumption is supported by favourable demographics and the trickle-down impact. Positive trends in outsourcing are likely to continue. There is strong potential for food processing, bio-fuels, microfinance and knowledge process outsourcing.

India has the potential to further lift its growth level from 8 per cent to more than 10 per cent. Key hurdles include infrastructure development and talent shortage .

The report, commenting on Pakistan, which has registered remarkable growth figures, said growth hit projected seven per cent target on above-target agriculture and service sector performance. Target set for fiscal year 2008 is seven per cent. Tight monetary conditions have slowed manufacturing growth and imports last year. If this continues, FY08 growth will fall short of target.

FY07 CPI is at 7.8 per cent against the 6.5 per cent target. Food prices will remain high because of adverse weather conditions.

[rexdmx]

To revalue or not, the debate goes on
By Jon Earl, Special to Gulf News
Published: August 03, 2007, 23:12


Currencies of the GCC states are increasingly under the spotlight. At issue is whether governments should continue to peg their currencies to the dollar - and if so, should they be re-valued?

GCC central banks are under increasing pressure at home and from international investors to let their currencies appreciate significantly against the dollar. Many would like to see GCC central banks introduce more flexible regimes as opposed to retaining such a close link to the US dollar.

Merrill Lynch estimates that the region's currencies need to appreciate by as much as 37 per cent against the dollar. Pegging GCC currencies against a basket of currencies would help to combat rising domestic inflation and to correct economic imbalances caused by an excess of savings.


--------------------------------------------------------------------------------


--------------------------------------------------------------------------------


"The fixed currency regimes in the GCC region have exacerbated the problems associated with a sustained rise in oil prices, strong economic growth, higher inflation and rapidly rising current account surpluses," says Emma Lawson, Foreign Exchange Strategist at Merrill Lynch.

Signs of change

The first signs of change have appeared. Kuwait decided in May to peg its currency to a basket of currencies and allowed its currency to appreciate against the dollar for a second time on July 11. Merrill Lynch expects a similar move by the UAE or Qatar before the end of this year.

The dollar peg combined with an accumulation of oil revenues has allowed GCC nations to build up an excess level of savings of $134 billion. This figure accounts for a large share of the $180 billion 2006 current account surplus for the region.

Allowing the GCC currencies to appreciate would also enable the region to reduce its excess surplus to a sustainable level, thus restoring some balance within the global currency system.

The strength of GCC economies means that a change in the foreign exchange regime is unlikely to generate any slowdown. Growth in the region is running well ahead of 10-year averages. The availability of and use of credit is rising rapidly, the demand for domestic goods is increasing and most importantly, infrastructure spending is very strong.

Investment spending numbers in the Middle East are massive. Projects valued at more than $1.4 trillion are either planned or are currently under way in the GCC, according to the Middle East Economic Digest.

Merrill Lynch believes moving from the dollar peg to a basket of currencies could help alleviate some of the inflationary pressure now being felt in the GCC. It also believes that Kuwait decided to move to a floating exchange rate regime in order to address inflation, which at 5.2 per cent is well above the 10-year average of 1.8 per cent.

Merrill Lynch expects that if the economic boom continues and real interest rates rise, the region would see significant inflows of capital from outside the region - from both portfolio investment and foreign direct investment.

- The writer is vice president, Financial Dynamics, Bahrain.

[rexdmx]

hey sameerl, i was contacted by one guy from emerald investments...ever heard of him?
pm me your email address and i'll forward you his letter

Originally Posted by sameerl

Thanks. Was on a business trip throughout the region

[sameerl]

rexdmx:

Just did it.
Rgarding the Merrill Lynch report, its good to see atleast some analysis that is based on reality.

[sameerl]

Its interesting to note the continuing ramifications of the spiraling cost of living and the relative exchange rates in the UAE markets. Labor and staff from India are unwilling to locate to the UAE, as the Indian Rupee has appreciated by more than 25% against the AED. Many in their presrnt jobs are relocating. Although no hard data is as yet available, employment agencies estimate that approx 5-7k white collar Indian employees have left the country this year. This is adding to further salary pressure and leading to further costs increases in a vicious cycle for the city.

Meanwhile HSBC already notes that the revaluation of the Kuwaiti Dinar (2.64% to date) is having a positive impact towards curbing prices. Further food for thought.

[rexdmx]

you know what; before i left to work i was watching BBC business and they were talking about the appreciation of the indian currency to the dollar as well. the journalist said this increase has caused a 10% increase in the cost of goods and the exporters are having a harder time competing with china's goods
The finance minister then responded that the exporters should learn to be more competitive...

do you think they would be a labour shortage and what would be the consequences on currency (if there is one)

Originally Posted by sameerl

Its interesting to note the continuing ramifications of the spiraling cost of living and the relative exchange rates in the UAE markets. Labor and staff from India are unwilling to locate to the UAE, as the Indian Rupee has appreciated by more than 25% against the AED. Many in their presrnt jobs are relocating. Although no hard data is as yet available, employment agencies estimate that approx 5-7k white collar Indian employees have left the country this year. This is adding to further salary pressure and leading to further costs increases in a vicious cycle for the city.

Meanwhile HSBC already notes that the revaluation of the Kuwaiti Dinar (2.64% to date) is having a positive impact towards curbing prices. Further food for thought.

[rexdmx]

Kuwaiti dinar at 18-year high against dollar
Agencies
Published: August 05, 2007, 12:34


Kuwait: Kuwait's central bank allowed the dinar to appreciate on Sunday for the second time in a week, taking the currency to at least an 18-year high against a tumbling US dollar.

The dinar will trade up 0.11 per cent around a midpoint of 0.28170 per dollar compared with 0.28200 on Thursday, the central bank said, the strongest since at least January 1989, according to Reuters data.

The currency of the Middle East's fourth-largest oil exporter has now risen 2.64 per cent since May 19, a day before the central bank dropped its peg to the weakening dollar and
adopted a basket of currencies. Kuwait has declined to give the composition of the basket.

The dollar tumbled on Friday, hitting two-year lows versus the Swiss franc as fears about losses in the US credit sector intensified.


--------------------------------------------------------------------------------


--------------------------------------------------------------------------------


The US currency declined to a record low last month against the euro in which Kuwait pays for more than a third of its imports.

"I expect the dinar, adjusted on a regular basis, to reflect the dollar's performance against major currencies," said Simon Williams, Middle East economist at HSBC.

[rexdmx]

Kuwait exercises currency controls twice in a week
Reuters
Published: August 05, 2007, 23:05


Kuwait City: Kuwaiti inflation topped five per cent for the third month in a row in May, underpinning the central bank's decision on Sunday to strengthen the dinar to at least an 18-year high in a bid to reduce import costs.

Kuwait's central bank allowed the dinar to appreciate against the dollar for the second time in a week, up 0.11 per cent, taking the currency's cumulative rise since the day before dropping its peg to the US currency in May to 2.64 per cent. The dollar slid to a record low last month against the euro, the currency in which Kuwait pays for more than a third of its imports.

Rising inflation

Annual consumer price inflation in Kuwait at the end of May was 5.34 per cent, compared with 5.37 per cent in April, government data obtained by Reuters showed.


--------------------------------------------------------------------------------


--------------------------------------------------------------------------------


Inflation rose above five per cent in March for the first time in at least a decade, and compares with an historical average of less than two per cent, according to Deutsche Bank AG.

"The figure is all but unchanged on the previous month," said Simon Williams, Middle East economist at HSBC. "It's a slower pace of price-growth than we are seeing in other parts of the region but it's up on the first quarter and still looks high."

The central bank has said the dollar's decline in global markets is driving up inflation and making some imports more expensive.

The dinar will trade around a mid point of 0.28170 per dollar, compared with 0.28200 on Thursday, the central bank said, the strongest since at least January 1989.

Kuwait declined to disclose the composition of the currency basket it adopted on May 20 but has said the dollar plays a "major" part in it. Standard Chartered estimates it at 70 per cent.

"The central bank will be watching domestic inflationary trends closely," Williams said.

"If they don't see price growth slowing into the fourth quarter they might well be tempted to allow the dinar to appreciate once again."

[sameerl]

rexdmx:

One of three scenarios could unfold :

1) The UAE does not revalue and the dollar remains week for the medium term: In this event, you will see more Indian workers (both laborers as well as professionals) leaving the UAE. I read a report from a talent agency that estimates the exodus to be in the vicinity of 25k professional over the next year. This could be potentially disastrous for a city that is desperately seeking to attract talent.

2) The UAE does not revalue and the dollar strengthens: This dampens inflation and will reduce or perhaps even eliminate the exodus currently taking place.

3) The UAE does revalue: Same as (2) but a stronger effect as the impact on inflation will be a lot quicker.

Option 3 also allows the Ministry to revert back to free market economics rather than the Big Brother type regime it has been forced to adopt via price controls and hotlines to inform the government of any price hikes. This is clearly detrimental to the business climate and will not serve the country's interest at all.

On another note, Standard Chartered has revised up their estimate for UAE inflation to 9.3% from 7.3%. Whilst teh revised figure is still low, it atleast acknowledges the price pressures in the economy. The Ministry in Abu Dhabi has also acknowledged that the current inflation index is also incorrect and will take steps to rectify the calculation, another admission that the price figures being reported are off (as has been stated by Moodys as well as the IMF).

[rexdmx]

if there is a large exodus of workers back to their home country, especially indians for example who make up a sizeable amount of the work force..would that be good for us (remaining workers) giving that theoretically speaking they should be a wage hike..? or will it have effects on only several sectors...?

Originally Posted by sameerl

rexdmx:

One of three scenarios could unfold :

1) The UAE does not revalue and the dollar remains week for the medium term: In this event, you will see more Indian workers (both laborers as well as professionals) leaving the UAE. I read a report from a talent agency that estimates the exodus to be in the vicinity of 25k professional over the next year. This could be potentially disastrous for a city that is desperately seeking to attract talent.

[sameerl]

rexdmx:

There's no doubt that if people leave, there will be a further upward pressure on salaries (we can get into detailed discussions as to what sectors will benefit) but that's not the point. The issue is that if people leave, and salaries rise, it further fuels inflation. The vicious spiral of cost push inflation gets worse.