Dollar slide: is the Gulf ready to cut loose? No doubt about it, the dollar is in trouble and things look set to get worse before they get better. With oil prices standing at $90+ a barrel, the coffers of oil-producing states are bulging, but in real terms the scenario is giving rise to serious and widespread concern

Middle East, The, Dec, 2007 by Pamela Ann Smith

"Instead of struggling with an unsustainable exchange rate model," the bank's Serhan Cevik goes on to argue, "GCC economies should embrace the idea of currency realignment and greater flexibility that would support macroeconomic stability and diversification ... Mimicking the dollar's weakness, instead of reflecting economic fundamentals that justify appreciation, oil-based currencies have become misaligned and worsened imbalances in the region and throughout the world."

And, in an indication of just how serious the argument has become, the Wall Street Journal reported on 2 November that, "Nowhere in the Middle East are the strains more acute than in the UAE, where investors are betting on a 'depegging' of the dirham as domestic inflation increases." Total deposits held in banks in the UAE have exceeded one trillion dirhams ($272bn) for the first time, "more than is deposited in the region's largest economy, Saudi Arabia," the Journal noted. "Attracting that money are chances of a quick profit once the peg snaps."

"The probability of depegging has increased," said Dubai-based chief economist at Credit Suisse Group, Kamran Butt. "The market consensus is for the UAE to depeg."

Aside from irritating US officials, such a move, analysts have pointed out, would add yet more downward pressure on the dollar at a time of great global economic uncertainty and record oil prices. And while the US Federal Reserve may decide to defer rate cuts given inflationary pressures (including a 58% rise in the crude oil price in the US this year), the result many analysts say, would be a sharp increase in the likelihood that the housing market and financial sector woes, as well as the credit crunch, would provoke the sharp slowdown in the US they have been trying to avoid. The expectation, therefore, is that the Fed will go ahead and cut rates further, possibly to as low as 4% by the second quarter of next year, according to Dimitry Fleming at Dutch bank ING.

Moreover, a decision by one of the GCC countries to depeg, without the others doing so as well, would make the prospect of a currency union in the Gulf, scheduled for 2010, virtually impossible. "Sharing similar institutional arrangements and socio-cultural values is not enough to create an optimum currency area," Cevik wrote in the Morgan Stanley report. Economic and financial policies, especially concerning foreign exchange rates, must also be agreed and co-ordinated.

In the meantime, barring a decision to depeg, it appears that the citizens of the Gulf, along with their guest workers, will have to live with the prospect of substantial rises in their cost of living, as well as the prospect of less money to send home.

Gold set for record climb

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The sliding dollar, record crude oil prices, geopolitical turmoil and, last but not least, the chaos in the US banking sector, housing meltdown and renewed credit crunch helped propel the price of gold to record levels in nominal price terms in early November. By 6 November, the price had reached more than $823 an ounce, having broken the psychological benchmark of $800 earlier than originally expected before the eruption of the dismal news from Wall Street at the end of October.