Gulf Arabs Could Drop Dollar Pegs in Unison [Update][UPDATE 2], page 1

UPDATE is down the page.

UPDATE 2 is here

Gulf Arabs Could Drop Dollar Pegs in Unison

www.reuters.com

Gulf Arab oil producers, torn between rising inflation and exchange rates fixed to a sliding dollar, could consider switching together to a currency basket to buy time for a troubled monetary union project.

A region-wide shift could catch investors unawares ... "They have been hinting at a more flexible option to the dollar peg. The debate is on, at a multilateral level," ... since Kuwait threw plans for monetary union into disarray by abandoning a dollar peg the six states had agreed would stay in place until they created single currency in 2010.

"The likelihood of moving in unison is greater than the likelihood of moving alone."

More importantly statements from Saudi Arabia, the country tipped as least likely to revalue in the Reuters poll, have begun to more closely reflect those coming from the UAE.

(visit the link for the full news article)



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[edit on 10/31/2007 by Gools]

[edit on 12/4/2007 by Gools]

[edit on 7/24/2008 by Gools]

This comes on the heals of another story about OPEC considering abandoning the petrodollar system (OPEC to Study Currency Basket for Pricing).

This story came out yesterday on Reuters and, once again, a news search confirms that (as of today) no mainstream media has picked it up.

With the rate cut by the FED today this eventuality is even more probable, especially if these countries want to meet their 2010 deadline for a regional currency. They simply must stabilise the situation for themselves and unhooking the peg to the falling dollar may be the only way.

It will be interesting to watch whether or not Saudi Arabia once again goes against the FED in refusing to match the rate cut.
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www.reuters.com
(visit the link for the full news article)

UPDATE:



And for those who think that it could never happen, I looks like certain insiders have already started to anticipate the revaluations:



So the rulers and money changers are already acting like it's a done deal. The revaluation is already in progress "on the ground" and only an "official announcement" is left.

Add this to the fact that the Fed is making noises about a 50 basis point cut next week and you have another round of dollar devaluation on the horizon.
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reply to post by JSR

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the how low part, I can't answer... but at some point there will be a reversal of roles. We can't be consumers if our money isn't worth anything, so we're going to have to provide the services and products for ourselves. And in the meantime, other countries are replacing us as the consumers and will be turning to us for "their services". The way I see it, foreignors will buy the US and make us work for them... it's just a matter time, let's see which comes first... role reversal or acpocalypse in 2012

[edit on 12-4-2007 by worldwatcher]

Another update:

Despite the fact there there was supposedly no official agenda item to discuss the dollar peg a decision was made to keep the peg for the time being.



My guess is that they will wait and see what the FED is going to do next week.

Interesting that Dubai is acting like it's a done deal, but that US puppet Qatar is announcing that there will be no move. I can only imaging the politicking that is going on behind the scenes.

PS: JSR "You cant imagine how free that feels." Yes I can.
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These are some of the latest rumblings on de-pegging currencies from the US dollar.

This update on the situation in the Gulf States comes from Canada's Globe and Mail. The longer the Gulf States keep their Dollar Peg the more problems they are having with rampant inflation. According to the article they are approaching the precipice of a major decision point. It's a long article but here are some highlights of the argument:

The Peg Precipice

OTTAWA — Inflation control measures in the Middle East are almost as rampant as inflation itself these days.

Qatar just froze the price of steel and cement, and extended a diesel subsidy. Bahrain is spending more than a billion dollars a year to subsidize food and fuel. The mainly foreign construction workers in United Arab Emirates have launched strikes and riots as they watch the value of their savings erode.

Gulf countries are swimming in oil wealth but drowning in inflation - caused in large part by their own unrestrained consumer demand, and their insistence on hanging on to fixed exchange rates, analysts say.
...

Pegged exchanged rates prevent those countries from raising interest rates to keep inflation under control. Instead, to maintain the exchange rate, they have to match U.S. monetary policy. Interest rates in the United States are highly stimulative, however, designed for an American economy struggling to avoid a recession - not a Gulf country whose coffers overflow with oil money.

Qatar's inflation is running at about 14 per cent. Egypt is at 19 per cent.

The average for the region just two years ago was a mere 2 per cent.

economists and currency traders wonder whether Gulf countries will soon be forced to move away from their inflexible currency pegs to the U.S. dollar and opt to peg to a basket of currencies or float freely. That would trigger a loss of confidence in the already shaky U.S. dollar and send the greenback into a downward spiral.

"You're going to get huge instability one way or another. You're going to get it if they un-peg, or you're going to get it when the inflation finally gets loose domestically," he said.

Tick... tick... tick...

If you think 2008 is bad for your pocketbook wait until next year.
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edit: link fixed

[edit on 7/24/2008 by Gools]

reply to post by Gools

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the link is not working for me.

could you check it?

reply to post by JSR

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Sorry about that.
Should be ok now.
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reply to post by Gools

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Aye...

It's bad. To explain it in the layman's terms for the not-so-economic-savvy ATS'er.. let's put it this way.

2001: All is well in the Arab World.. oil producing nations are wealthy beyond measure. The people don't pay taxes, they get free healthcare, education and so forth .. the world pays them almost no attention. We see them as exotic turban wearing taxi drivers and nothing more. 2001 gives us 9/11 .. thus Arabs are thrust into the lime light of the World stage, be it bad or good.

2002: Increased liberalization of the Gulf States as far as economic development is increased in nations like Bahrain, Qatar, Saudi Arabia, UAE and even Jordan. The plague of the Middle East is that there is one industry and one industry alone: Oil The quandrum to solve the problem as to expand the economic diversification and thus, wealth diversification of the population is solved in an unlikely way .. Oil. Truly the life blood of the region. The increasing profits from oil revenue as the price pushed higher as war escalated caused a massive stock market explosion in the Gulf State, mainly Saudi Arabia.

2003: Saddam fell, being the only regional power that threatened stability. With this menace gone, the black market industry exploded, and the price of oil went even higher. The price of oil reaching $40 a barrel was a 100% increase in oil profits from 2001 to 2003 .. an amazing and unprecedented increase.. imagine the US's wealth doubling in three years. The governments awash in floods of US Dollars began buying up the American Stock Market. The money we gave them for oil to run our war machine against their brothers (albeit, no one liked Iraq) was being used to purchase mass quantities of the US Infrastructure. Not for malicious purposes but simply in the era of economic and global expansion, to own a piece of the behemoth that will run the World is a good idea.. mainly they bought into the Financial markets, but it gets worse.

2004-2007: The war drags on, the money is spilling into the region at billions upon billions a day .. a perfect example of what the region is to become, is to look at a city like Dubai in the UAE.. an explosion of wealth. As America poured it's vast resources into the region, the markets of these countries exploded as well, fueled by oil prices as they neared 100 dollars a barrel.

All this cash awash in these nations meant that even more economic expansion was possible.. the people could buy like never before, as the nations where and are beyond wealthy.. food, construction, hell Dubai alone is an inflation nightmare.. because of the abundance of wealth concentrated in such a small region of the World, the demand for more Dollars per service increased rapidlly..

Now you might think, what ever, because the countries where wealthy to begin with. But it was not the same as receiving a Dollar in 2001 as it is in 2008 because it is worth only a fraction of it's previous value.. all over the World many small countries pegged currencies to the Dollar, and because of that as the Dollar devalued the price of good sky rocketed.. now not only did the oil rich countries have massive increased construction expenses, but their own people who, with out a regional industry aside from oil, where dirt poor and couldn't feed themselves.

2008 saw the crisis really set in .. the Dollar dropped 35% in 6 months and the third world was rocked by hyper inflated food prices, which luckily have calmed some.

But the problem still resides in the Dollar.. by moving away from the Dollar, they would peg to another currency, meaning fewer bills to buy the goods.. because it now took so many Dollars to buy what they once could..

If the price of oil drops it is assumed that prices will fix themselves once more, however it's a complicated problem.. let me explain:

1. At the height of the economic problems, the US financial institutions needed to raise massive amounts of cash.. they turned to the cash soaked Arab World for some assistance.. the UAE and Saudi Arabia alone purchased a considerable share in the major institutions, via common stock that was issues and bonds.. it was in their eyes a victory because they owned a good share of the US's economy now, and it would alleviate the stress of inflation ..

2. The bank's plans failed and billions more where written down (a correction of financial reports) and Bear Stearns collapsed.. the Fed continues to inundate the financials with printed money, inflation worsens again and the banks use the money to speculate oil to well over $140 a barrel.. remember in 2001 oil was only $25 a barrel.. the increase is staggering..

3. If the banks sold oil positions their accounts would drop considerably and they would be even more at risk of failures.. already Indymac, the largest banking failure in American History has occurred.. but also because if the banks sell off oil positions, and drop the price of oil.. the income of the oil producing nations is cut down considerably.. but yet the price of goods they need to sustain their new economies will still be expensive.. this would put the Arab world into a massive state of shock..

Iraq is still in economic turmoil, and most of the ME countries are suffering economically with the World, and Pakistan is officially in an economic depression ..

So I will say that we are all bound together to the faults of the few who's bad decisions and unethical practices quite literally has rocked the World's markets and lively hood.. the World economy is in such a state of disarray and unorganized problems that the likely hood of a magical fix like our politicians would announce, is impossible. Truly the scope of the problem is not being reveled and it goes so much deeper then anyone could have expected.. the only reason I can think to hide the dire information of the World's economy as a whole is to stop a panic from occurring..

Then again, it does not take much searching to see that all the Nations of the World of intertwined their fates in the American economy.. or rather.. is we American's who intertwined our fate with the World?

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