Earlier this week, we reported that the members of OPEC are
mulling the possibility of pricing oil contracts in a basket of currencies,
rather than solely in Dollars. In a
related move, the members of the Gulf Co-operation Council (GCC) are also
rethinking their exchange rate policies. Currently, the members of the GCC, consisting of United Arab Emirates (UAE),
Saudi Arabia, Kuwait, Qatar, Oman and Bahrain, all currently peg their
respective currencies to the Dollar, in some form or another. However, this policy is being scrutinized as a
result of the falling Dollar, which has dragged down GCC currencies
proportionately and triggered double-digit inflation.
In fact, Kuwait
has already de-linked its currency from the USD and instead pegged it to a
basket of currencies, so as to give it more flexibility in conducting monetary
policy. This represents the most likely
course for the rest of the GCC, since it would allow them to maintain exchange rate
stability while increasing their flexibility in conducting monetary policy. This policy change, combined with the
potential switch in oil pricing among OPEC nations, bodes ill for the
Dollar. At the very least, it would
result in decreased demand for USD and for Dollar-denominated assets. At worst, it would result in active
diversification, of rotating foreign exchange reserves into assets denominated
in other currencies, to support the new peg.
Read More: Countdown to lift-off
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