GCC countries may drop dollar peg -- Lower oil prices
July 9, 2008
The Gulf Cooperation Council (GCC) countries may drop their peg to the dollar by 2010 if they follow the recommendations in a recent Abu Dhabi report. The GCC official policy is that they will retain the peg until the Council has created a monetary union, similar to the EU, among its members.
The peg fixes the exchange rate of each countries currency to the dollar. Since the dollar has declined 40% since 2002, this has caused an inflation rate of 10% in these countries by forcing the price of oil and other commodities to increase.
The report was issued by the Abu Dhabi Department of Planning and Economy (DPE). It is the first official recommendation to drop the peg since Kuwait switched to and exchange rate based on a basket of currencies. The report suggest that the GCC countries follow suit, basing the basket on the currencies of Europe and Asia, who have become a larger trading area.
The report was issued before the GCC finance ministers' meeting in September, and the GCC summit in November. (Source: The Economist, Dropping the peg, July 8, 2008)
What the GCC countries means to the dollar:
The GCC countries supply about 1/3 of U.S. oil and own up to $500 billion of U.S. capital. If they no longer peg to the dollar, they will not need to buy so many Treasuries to stabilize their exchange rate. This will cause the dollar to decline further, causing more inflation in the U.S.
On the other hand, it will also mean that oil is no longer priced in dollars. This could result in lower oil prices. However, nothing will happen quickly -- the report admitted that potential implications need to be well-studied.
GCC Quick Facts (2007)
| Country |
GDP Growth Rate |
Oil as a % of GDP |
GDP per capita |
|
| UAE |
7.4% |
40% |
$37,300 |
77% |
| Qatar |
14.2% |
60% |
$80,900 |
89% |
| Bahrain |
6.6% |
11% |
$32,100 |
89% |
| Kuwait |
4.6% |
50% |
$39,300 |
84% |
| Oman |
6.4% |
N.A. |
$24,000 |
76% |
| Saudi Arabia |
4.1% |
45% |
$23,200 |
78% |
| Compare to: |
| U.S. |
5.2% |
N.A. |
$43,500 |
99% |
| EU |
2.8% |
N.A. |
$29,500 |
N.A.
|
| World |
5.2% |
N.A. |
$10,000 |
82% |
(Source: CIA World Factbook)
Action steps:
Protect yourself from further dollar decline by making sure you have emerging markets in your portfolio. Commodities are also a good hedge against a declining dollar, but oil may decline as a result of the GCC action, so stay away from oil-related commodities funds.
For more on how to protect yourself from a dollar decline, see the WorldMoneyWatch Special Report The Dollar Collapse.
For more on the GCC countries, see the WorldMoneyWatch Top Ten Trend,
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