The UAE announced today that it was at a crossroads with regard to the Dirham's dollar peg. The announcement followed a remark by the Qatari prime minister that the dollar was hurting the Qatari economy, which in turn followed decisions by the Gulf countries not to shadow American interest rates.
It is also coupled with recent warnings by Meryll Lynch that the peg would be difficult to sustain.
It seems increasingly likely that the riyal will be unshackled from the dollar. If another GCC country leaves the dollar peg (Kuwait has already abandoned it) there will be little point in others continuing. What's more, it is unlikely that these statements would have been made if the countries were serious about maintaining the dollar peg.
If these countries do abandon the greenback there will be a sigh of relief from many expatriate workers.
Expatriates have, in recent months, seen the value of their wages hit by inflation. This inflation has been at least partly caused by the rising cost of non-dollar imports. Because of the dollar peg, central banks have been unable to control the inflation through interest rate rises.
Most expatriates are also here to save money or to send money home. However, as the riyal has been dragged down, the value of their money in their home currency has devalued.
All these indications of devaluation, in addition to the difference in interest rates arising between America and Qatar, is bound to invite currency speculation.
In fact, I’m tempted myself to bring some of my savings into the currency. Speculators with a bigger appetite for risk – hedge funds and investment banks - will no doubt be tempted to borrow money in dollars and buy riyals.
They will then enjoy two benefits – higher interest rates than in America, and a big profit if and when the riyal revalues.
Ultimately, speculators may force the Gulf countries to abandon the peg - whether they want to or not.
Also see:
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