US gives approval for GCC to drop dollar pegs, Merrill Lynch

26 May 2008

The US treasury’s positive outlook for the dollar and recognition of the inflation problem in the GCC, have effectively given regional governments a green-light to drop the dollar peg and track a basket of currencies, according to a report from US investment bank Merrill Lynch.

A submission by the US treasury to congress draws attention to the inflation and currency issues in the Gulf for the first time. Merrill says: “We believe the inclusion effectively gives the GCC countries the green light for change.”

The bank suggests that the UAE and Qatar will move to a currency basket in the next few months, which will also involve the dirham and riyal appreciating by 5 per cent by the end of 2008. it also expects Saudi Arabia to change its peg to the dollar in 2009.

Speculation about whether the GCC countries will revalue their currencies has been rife since last autumn when the US Federal Reserve began cutting interest rates. The moves were followed by GCC central banks because of the currency pegs, but put further upward pressure on already rising inflation rates.

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