So the GCC central bank might come to Abu Dhabi. The statement has since been retracted, but it was a headline last week, and would be some sort of coup for the UAE.
September 23, 2006 | Gulf News | Andrew Shouler
https://gulfnews.com/business/sectors/banking/casting-off-from-the-dollar-1.256170
For many observers, however, the bigger story lay underneath in any case, in the apparent confirmation by Central Bank Governor Al Suwaidi that the US dollar will be abandoned in its role of currency peg, not by 2010, but by 2015.
If confirmed, it raises all sorts of questions, not just for the monetary regime and economies of the Gulf countries, but maybe for the dollar itself, hitherto pretty much unchallenged as the world’s unofficial reserve currency.
Central banks around the globe have stockpiled it in their reserves, and the Asian countries running huge trade surpluses have found themselves recycling those funds back whence they came, not only for investment opportunity but to help cover their own exposure.
The US has been able to run increasingly heavy deficits accordingly. Not even the triumphalist emergence of the euro took too much of a shine off the dollar’s pre-eminence. But if the creditor countries, in whole or in part ditched their traditional benchmark, this perpetual motion model might be under threat. It may be an unduly alarmist view, but it’s worth scouring around for some answers to the general proposition of a dollar implosion.
Some of the facts are plain and their implications unavoidable. US deficits imply dollar weakness for some time to come. “Some are suggesting that one of the reasons for current euro and sterling strength is that oil surpluses are [already] favouring those currencies,” Philip Khoury, Head of Research at EFG-Hermes, observes.
“Likely US slowdown driven by weaker consumption is likely to [bring it down further] due to lower interest rates.” The outlook seems no better. “Rising external indebtedness does not portend well for the dollar’s role.”
There are many who would agree with that prognosis. “We continue to be dollar bears over the medium-term”, says Steve Brice, Head of Regional Research at Standard Chartered. Even so, the idea of breaking easily from the dollar meets with little bullishness. The relationship has been in place for so long, there is a certain comfort zone involved. Jasim Ali, Head of the Economic Research Unit, University of Bahrain, believes “GCC states tend to avoid change and risks. I think the GCC states would most likely avoid other arrangements, despite some of the statements made.”
The picture may be muddier than that, however, insofar as the GCC states have differing levels of motivation. “States that are more diversified (like Oman, Bahrain and the UAE) have less of an incentive to keep the dollar peg,” opines Jane Kinninmont, economist at the Econ-omist Intelligence Unit. That’s an issue which may still delay monetary union anyway, she suggests.
There’s another reason to be cautious. “I’d be surprised if the single currency were to float,” Gulf analyst Robert Powell, also of EIU, remarks. “It would expose the single currency to the vagaries of the oil market, would create uncertainties for firms looking to invest in the GCC, and could also be a setback for those states’ efforts to diversify their economies.”
So the prospect of setting the GCC currencies free may be dimmer than supposed. But what if it did happen? Would that be serious?
Any such shift, particularly if oil were to be priced in different currencies, may exacerbate the dollar’s downtrend, Brice at Standard Chartered confirms. “To some degree this would be a fundamental issue, in both current account and capital account transactions from the region. However, it could also have a significant psychological impact, as a step towards a shift in hegemony.”
That said, there is no obvious replacement at this juncture, he continues. “Europe and Japan are still struggling economically, and the Chinese yuan is still a long way from being a reserve currency.”
Therefore, the US dollar is likely to remain kingpin for years to come, it would seem. Brice reiterates the importance of the US to the rest of the world. “As such, we expect any such reduction in reliance on the dollar to be gradual.”
Amid this conjecture, the bolder line is to say that the hour of the independent regional currency is fast approaching. “I feel it is about time the GCC states allow their common currency to float. This would enable them to really determine their competitive situation in the world market,” says local economist and entrepreneur Abdullah Sharafi.
Emilie Rutledge, visiting professor at the UAE University, goes further, anticipating the creation of a Gulf ‘dinar’ which might itself displace the dollar in central bank accounts. “From a geo-political context, the dinar may be perceived as more morally acceptable than holding the US dollar, and also a more Islamically-acceptable currency to hold either in reserve or indeed even to peg to.” That thought cannot be too far from the authorities’ minds, although it puts the regional order and international relations right into the melting pot.
Yet, while the system of the US swapping paper greenbacks for manufactures and commodities is losing viability, it will still be the decisions made by China which will carry far greater weight, Rutledge maintains. At the same time, a certain fatalism applies. Sharafi argues: “The USA is a superpower, behaves like a superpower, and is treated as a superpower. These monetary changes would not affect its position. The two are just not linked.” Whatever lies ahead, uncertainty prevails for now. Once the GCC countries have resolved the currency matter, clarity should ensue.
“It is important that the central bank’s intentions are flagged some time in advance, so businesses can protect themselves against the different currency and interest rate exposures they will face,” says Brice, ushering in the risk management story.
Risk indeed there is, but the dollar might itself sail serenely into its sunset. And, since the world is round, it might even return from the other side. Tomorrow is another day.
Andrew Jeffreys, Editor in Chief of Oxford Business Group, puts it as succinctly. “2015 is far off, and conditions may change,” he reminds. Hard to argue with that.