Saturday, December 15, 2007

Currency Revaluation Stalls

Sorry for the wait - was overseas on business and could not get a moment free to blog. Apologies!

As you will know, the GCC last week decided not to announce an immediate revaluation last week. Anonymous pointed out that I'd given "too much credit to the GCC fiscal policy makers."

Indeed. I had expected a quick 5-10% revaluation, especially of the UED, to postpone discussion on switching to a basket of currencies, and to stop the huge inflows of speculative money. I was wrong.

I think at the Doha talks it was mainly the Saudi's who refused to play along, knowing what damage it would do to the dollar (and their friends in Washington) and their vast investments that are dollar denominated. The official comments that came out from Bahrain and Qatar, after the talks, shows that the issue of revaluation was indeed discussed. What I found most interesting - as pointed out by a Standard Chartered Bank report yesterday - was that the official Doha communique did NOT state that a revaluation was NOT going to happen!

There was clearly an inability of the GCC States to agree, but at least it seems they agreed not to act unilaterally.

Perhaps the GCC see it as a link to the common currency and will thus wait until 2009? But at these oil prices the problem will not go away. If the dollar stops falling, at least imported inflation will get a lot better, inflation being a sustained rise in the price of goods and services. But the real problem is the inability of the GCC under a dollar peg to raise interest rates to reduce liquidity in the economies. It doesn't help either that world food prices are skyrocketing in any currency. The bottom line will be a need for pay increases for both State and Private employees in the GCC and more inflation to come.

I'd still hold AEDs until at least after December...

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