From: Alejandro Valle Baeza (valle@SERVIDOR.UNAM.MX)
Date: Sun Jun 03 2007 - 16:20:09 EDT
Kuwait casts doubt over Gulf currency union By Simeon Kerr in Dubai The Financial Times , 03:14 p.m. 03/06/2007 Published: June 3 2007 18:11 | Last updated: June 3 2007 18:11 Kuwait’s decision to delink its currency from the dollar last month sent reverberations around the Gulf and beyond. Central bankers were surprised that Kuwait had broken ranks in spite of months of hints that it would act to offset the weakening US currency’s effect on raising import prices, which were fuelling inflation. If Kuwait’s oil-rich neighbours also dropped their dollar pegs, the effect would be felt way beyond the Gulf. Countries in the region could buy fewer dollars and put less of their booming foreign exchange reserves into US assets such as Treasury bonds. Analysts say a domino effect across Gulf currencies is unlikely in the short term because of resistance from central banks, which have known only the dollar peg since the early1980s. Saudi Arabia, the region’s economic giant, strongly downplayed the chances of revaluation. It is not as concerned about import-led inflation and values currency stability too highly. But Kuwait’s move has raised the debate over whether Gulf countries should peg to a trade-weighted basket of currencies rather than just the dollar. Kuwait’s revaluation is the end to a short, four-year experiment intended to herald a unified currency in the Gulf Co-operation Council (Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman) by 2010. Kuwait dropped a basket for the dollar peg in 2003 in preparation for a single currency. There were doubts over currency union before Kuwait’s revaluation. Oman had said it would not meet the deadline. Kuwait remains committed to the single currency, it says, but would have to re-establish the dollar peg or persuade the other GCC states to adopt the basket. The International Monetary Fund has advised GCC members to keep pegs intact. Lower inflation would be outweighed by perceptions of currency instability, it said. But some economists argue for a common currency tied to a trade-weighted basket. When the decision was made to peg to the dollar, oil prices were low and the US currency strong: the reverse of today’s situation. Pegging to a basket would better reflect the GCC’s modern trading patterns. It has closer links to Asia and the eurozone than almost 30 years ago. GCC central banks are quietly mulling how to deal with undervalued currencies, analysts say. Standard Chartered Bank has said there is a 25 per cent chance that the UAE will allow the dirham to appreciate this year. “The only country that would consider revaluation would be the UAE, but it still isn’t a high probability,” says Monica Malik, economist with regional investment bank EFG-Hermes. The country said last month it was “sticking to the dollar for the time being”. -- Posgrado Facultad de Economía Av. Universidad 3000 Circuito interior México 04510, DF México Tel. 55-56222148 fax 55-56222158 Página web: http://usuarios.lycos.es/vallebaeza
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