-- Posted Wednesday, 21 October 2009 | Digg This Article | | Source: GoldSeek.com

Talk about revaluation of the Gulf currencies is back on the agenda as rising inflation exerts pressure on the Gulf dollar pegs, while at the same time rumors of discussions about linking a new single currency to a gold standard have been so emphatically denied that skeptics wonder if there is some truth in it.

Over the past year Gulf States have seen inflation retreat from the double-digit levels of the oil boom years. But with oil prices having more than doubled since a low last December, those inflationary forces could be about to reassert themselves.

Dollar pegs

The problem for GCC countries is that with all but one of their currencies pegged to the dollar this means that US dollar weakness is automatically imported whatever the local conditions. In the boom period that meant artificially high inflation rates, also fueled by the associated direct link to US interest rates that stayed low for far longer than was healthy for Gulf economies.

Now that some semblance of recovery can be discerned in the global economy, and with the IMF forecasting better times ahead in 2010, the Gulf States might choose to learn from their recent experience and move to a different currency regime.

The time is ripe as four of the six GCC countries are committed to currency unification as early as next year, although this looks impossible to achieve in practice. This would seem a good period to contemplate a break with the dollar peg, perhaps following the Kuwaiti example of a basket of currencies rather than sticking with the peg as the Saudi Arabians appear to favor.

Broadening the Kuwaiti currency basket model to include gold is also worth serious consideration. Gold is a traditional anchor currency and appreciated for its fixed supply in an era of fiat money printing.

Dollar-denominated assets

However, the Gulf States keep a large proportion of their huge overseas assets in dollar denominated assets, and the danger of revaluation is that it undermines the value of these reserves in local currency terms. That has always been the argument from the UAE side for maintaining the status quo.

So it would be surprising if the Gulf States took the lead in revaluation and creating a new gold standard currency. Presently the six GCC countries are unable to agree on a new common currency, let alone a more radical shift like revaluation and a gold standard.

But if other nations like Russia and China took a lead in currency reform that might well put these ideas higher up the policy agenda.

-- Posted Wednesday, 21 October 2009 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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