Tuesday, 26 May 2009

An eye on the dollar

Gulf states should rethink dollar peg — Krugman

ABU DHABI — Gulf Arab states would be better off if they dropped their currency pegs to the US dollar, Nobel Prize-winning economist Paul Krugman said yesterday.

Countries in the Gulf Cooperation Council (GCC) have wrestled with the issue in recent years when a weak dollar was stoking inflation in the region.

Kuwait is the only Gulf Arab state to have dropped its peg to link its dinar to a basket of currencies in May 2007.

"I think it’s not (wise), just on general principles," Krugman said of the region’s use of the dollar peg.

"You have a region that does as much trade with the euro zone as it does with the United States ... Having a dollar peg exposes yourself to a lot of gratuitous fluctuation," he told reporters on the sidelines of a seminar in Abu Dhabi, the United Arab Emirates capital.

Inflation has since fallen as the dollar revived, oil prices fell and the global economy declined, taking some of the heat out of the issue for now.

Kuwait is committed to a GCC currency union. The UAE said last week it would not join the common currency, citing disagreement with a GCC decision to locate a central bank in the Saudi capital Riyadh.

But Mr. Krugman said the basket of currencies that Kuwait has moved to made more sense for Gulf countries.

"If you feel you must have a currency peg then the economics suggest to a basket that more or less reflects trade weights," Mr. Krugman said, adding inflationary pressure would come round again should the dollar fall to previous lows.

Mr. Krugman said the GCC, which includes Qatar, Bahrain and Oman, had become a powerful economic bloc and would remain so because world demand for oil would not flag. He saw oil prices, now around $60 a barrel, gradually rising. — Reuters

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