|
|
Translate:
              Time to break free
Saturday, November 24th, 2007
The Middle East’s oil exporters should end their currencies’ peg to the dollar Nowhere are the dilemmas more acute than in the Gulf, where virtually all the oil-rich states peg their currencies to the greenback. The combination of soaring oil prices and the tumbling dollar is distorting their economies and fuelling inflation. When the Gulf states meet on December 3rd in Qatar, they should agree to loosen their ties to the dollar. The argument for linking to the greenback was to provide an anchor for the region’s economies, many of which are small, open and financially immature. In effect, the Gulf states import America’s monetary policy. The trouble is that a fixed currency makes it hard for oil exporters to adjust to swings in the price of oil. And monetary policy in the world’s largest oil-importer is not always right for those who sell the stuff. Soaring oil prices have brought the Gulf Arabs huge riches. Their real exchange rates, as a result, ought to rise. The simplest way to do that is for the currency to strengthen, but the peg prevents nominal appreciation. Worse, the dollar itself has been falling. The result is rising domestic inflation. Some smaller Gulf economies now have inflation rates of around 10%. What is to be done? The two most widely discussed options are to revalue or to shift to a currency basket (which Kuwait has already done). By repegging their currencies to the dollar at a higher rate, the Gulf states would alleviate some of today’s inflationary pressure. But they would not address the underlying mismatch between any oil exporter and a dollar peg. Switching the peg to a basket of currencies that included, say, the euro and yen as well would give the Gulf states a bit more protection against oil-price swings, but it is hardly a perfect fit. Since most big currencies belong to oil importers, the Gulf States would still be linking their currencies to monetary conditions that may not suit them. Eventually, the currency pegs should be abandoned. After all, developed economies that are big commodity exporters, such as Norway, allow their currencies to float. In recent years many emerging economies have shifted from exchange-rate pegs to a “managed float”. Instead of aiming for an exchange rate, their central banks have an inflation target. If the Gulf states move to a single currency, as they plan to in the next few years, that currency should surely float. But floating is not feasible in the short-term. These countries have no history of independent monetary policy and few institutions to conduct it. Look beyond a basketFor the moment, the Gulf states are stuck with a currency peg. But they could do better than the dollar. One intriguing idea is to include the oil price as part of a basket that includes the leading currencies (see article). This would ensure their currencies absorbed some of the impact of oil-price swings. A big uncertainty is what such a shift would mean for the dollar. In the short term, the effect on the Gulf states’ appetite for greenbacks would not be dramatic, since the dollar would have a big weight in any basket. And there should not be a sudden sale of the oil exporters’ dollar reserves. The worry is that the end of the Gulf states’ dollar peg would send jittery investors into a panic. That risk is real. But with oil prices rising and the dollar falling, the dangers of inaction are greater. The Gulf states need to get rid of their dollar peg now. http://www.economist.com/opinion/displaystory.cfm?story_id=10177927 Have Your Say: Time to break free Please read our posting guidelines before posting. Alternatively you can discuss this report here. Related News
|
Faced With Water Shortages, The World Bank insist upon Privatisation Of Water Last post by Unregistered @ 12:27 AM Go to Forum
| Latest Topics
Prophetic Signs that we are in the End Times Last post by StuartG @ 11:41 PM Are we set to go the way of Lemuria? Last post by StuartG @ 11:15 PM Icke. Conspiracy & Anti-Semitism Last post by StuartG @ 10:11 PM Three Steps To Save Jobs Last post by Thinking Man's Idiot @ 08:57 PM Mumbai massacre: War threats will only fuel terror Last post by Thinking Man's Idiot @ 08:57 PM Unions and activists beat back the BNP Last post by Thinking Man's Idiot @ 08:56 PM Democracy crisis shakes Thailand Last post by Thinking Man's Idiot @ 08:56 PM Welfare reform will risk increase in childhood poverty Last post by Thinking Man's Idiot @ 08:56 PM How workers resist recession Last post by Thinking Man's Idiot @ 08:56 PM  Email This Page To A Friend Latest Headlines
More World News  Archive
|
The views expressed in the RINF news wire and newsletter are the sole responsibility of the author (s) and do not necessarily reflect the views of the webmaster. RINF.COM: Breaking News & Alternative Media is Copyleft - Copy & Distribute Freely. News Forum |
IN THE past week Iran’s president, Mahmoud Ahmadinejad, has damned it as a “worthless piece of paper” and China’s premier, Wen Jiabao, has moaned that it is causing his country “big pressure”. The dollar’s relentless decline—it hit a new low of $1.49 against the euro on November 21st—is prompting jibes from America’s critics, jangling investors’ nerves and giving policymakers headaches.
Loading ...
