Gulf-based analysts point out that most of the currencies of the GCC are undervalued against the dollar, based on their current-account balances, inflation and costs of goods and services. The UAE dirham was undervalued by 10-15 per cent and the Saudi riyal by 25-30 per cent, according to a report by Deutsche Bank AG.
"The dollar peg prevents nominal appreciation. Since the dollar itself has been falling, the result is rising domestic inflation. Some Gulf economies now have inflation rates of around 10 per cent," analysts said. Markets piled pressure on Gulf currencies last year as speculation mounted that more GCC countries would follow Kuwait and abandon links to the weak dollar partly to curb imported inflation.
Barrow's comments come in the wake of similar observations made by Standard Chartered, which said Gulf Arab oil producers could revalue their currencies together if the US dollar weakens further, with appreciations of eight per cent in the UAE dirham and Saudi riyal likely before April.
"The only way out for the GCC countries, unless the Fed reverses course soon or the dollar soars, is to adjust the currency regime with either a free float, revaluation or the adoption of a currency basket,'' Barrow said.
and look at this reaction to the US Federal Reserve slashing interest rates:
"It's going to be very difficult for central banks in the region to have adequate control of monetary policy, and hence inflation, when the Fed is slashing rates left, right and centre and the dollar is slumping,'' Barrow was quoted yesterday by Bloomberg. Inflation in the GCC has reached record high with Qatar reporting a record 14 per cent surge in Consumer Price Index, followed by the UAE, Kuwait and other countries. The regional average was 6.3 per cent in 2007, compared with 0.3 per cent in 2001, according to Merrill Lynch & Co.