In the world of currency trading and forex markets, all eyes are on the meeting of the Gulf Co-operation Council, ending Tuesday. Opinions are divided on whether the Gulf states will stop pegging their currencies to the dollar, although there are good reasons to believe they will, notes the FT’s John Authers in Tuesday’s Short View column.
Kuwait, a GCC member, abandoned its peg in May. The five other GCC member states are grappling with rising inflation, in part thanks to food prices. An artificially cheap currency is not a good idea, Authers notes.
The FT reports from Qatar, which is hosting the meeting, that the UAE has been under greatest pressure to revalue, but its authorities have said they will follow the lead of Saudi Arabia, the region’s largest economy, where officials have insisted they will not alter the riyal’s peg. But speculation has mounted because of regional concerns about high inflation and calls from some members of Opec that oil should be priced in other currencies. The debate has intensified over some seemingly conflicting remarks by Gulf officials.
So bankers from London to Bahrain have been betting on revaluations, pushing the UAE dirham to a 17-year high and the Saudi riyal to its strongest level since its peg was introduced in 1986, heaping unprecedented pressure on the monetary authorities, the FT notes. The oil-rich GCC region includes Kuwait, Bahrain, Qatar and Oman, key US allies that control more than $1,000bn (€683bn, £486bn) in reserves.
But whether the region’s conservative leaders, who will be keen to present a scene of unity, will make any firm pronouncements after their meeting ends Tuesday is another matter, and few are expecting explicit statements, the FT reports.
Bloomberg, meanwhile, quotes Marios Maratheftis, Standard Chartered’s Dubai-based head of research, who said in a note to clients that “valuation and flexibility” are the two problems the region’s pegged currencies face as the dollar weakens. According to Maratheftis, the “probabilities for a revaluation, and a possible introduction of a currency basket soon, have increased substantially.”
Ultimately, the decision to de-peg – if it comes – “is not the stuff of which crises are made,” notes Authers. When Kuwait “de-pegged” from the dollar, it “re-pegged” to a basket of currencies, and since then its appreciation against the dollar has been steady. This is what various Gulf finance ministers have hinted they want to adopt, he adds.
Of the GCC currencies, only the Saudi riyal is in the Fed’s trade-weighted currency index, at a weighting of only 0.8 per cent. If the GCC de-pegs, it would be bad for the dollar, but not a disaster.
From the point of view of foreign equity investors, the Gulf countries seem to be in a sweet spot, says Authers.
Currency risk is on the upside. They benefit from the growing fad for “frontier” markets, which are growing but not yet included in emerging markets indices. They benefit from the rising price of oil. On top of that, they appear to offer a buying opportunity. The region’s stock markets dropped more than 50 per cent early last year, and remain more than 30 per cent below their highs.
The fate of other pegs, however, could have broader repercussions. The money entering Hong Kong in recent months is at least partly betting on an upward move for the Hong Kong dollar. And China, on a very much greater scale, faces some of the same issues as the Gulf countries.
Across the world right now, currency pegs are under pressure, Authers notes, adding. “But while that may sound like the wave of crises that hit emerging markets in the 1990s, there is a critical difference: back then the pegged currencies wanted to fall, now they are straining to appreciate.”