Gulf Nations May Look to Un-Peg Currencies From US Dollar

Will the Gulf Cooperation Council (GCC) say anything about its US dollar peg? There are six nations in the GCC; Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, Oman, and Kuwait. Kuwait dropped its dollar peg in May of this year, tired of importing inflation by following Ben Bernanke’s interest rate policy.

According to Bloomberg data, Saudi inflation is running at 4.9% a year, while the UAE copes with 9% inflation and Qatar deals with inflation of 14.8%. The falling greenback has led to soaring import prices in GCC countries.

Don’t feel too bad for them. Oil revenues for the year are incredibly high (US$200b in Saudi Arabia, US$60b in the UAE, and US$19b in Qatar.) But in countries where everything BUT energy must be imported, the dollar peg is highly inflationary. So why not shed the peg?

The dollar’s recent rally will have helped take the pressure off for a complete de-pegging at this week’s meeting. And for a move with such large consequences, you’d expect the GCC nations to make the move first and announce it later. No point in telegraphing your intention to buy more euros and gold and sell the dollar.

Hey did you see that there’s a credit crisis? Moody’s (NYSE:MCO), the ratings agency that made money giving SIVs investment-grade ratings a few years ago, has cut its top rating on six of the seven Citgroup (NYSE:C) SIVs we mentioned last week.

“In recent weeks, Moody's has observed material declines in market value across most asset classes in SIV portfolios,” it said in a press release. It said the downgrades reflect, “continued deterioration in market value of SIV portfolios combined with the sector's inability to refinance maturing liabilities.”

Well that’s good news. If the SIVs can’t roll over short-term debt or sell new debt to investors, their banking patrons will have to pony up the cash. If they don’t (or can’t), the SIVs will have to sell more assets. Either way, there could be a lot of selling pressure and fear on the Street this week as the credit bubble shudders on the verge of more rapid deflation.
And then again, maybe Wall Street will throw a party. ‘Tis the season.

Dan Denning
The Daily Reckoning Australia

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