"The issue is vital, for the region, for currency markets worldwide and for the US dollar in particular."The article thinks the main bone of contention between the different GCC states has been dramatic differences between each state’s oil and gas reserves. Resource rich states such as Saudi Arabia, Qatar and to a lesser extent the UAE, are better placed to invest in projects aimed at economic diversification and increased employment. Oman in particular has voiced concerns that the convergence criteria for monetary union are too restrictive, particularly in the area of public spending. The country’s central bank governor, Homud al-Zidjalihas publically declared, “we do not want to restrict our monetary and fiscal policies at present”.
“Leaps in the oil price mean the Middle East is once again one of the world's richest regions, pumping money into the City and Wall Street. Most of this cash has been dollar denominated, since the Gulf states receive their oil revenues in dollars.”
“If the Gulf states were to turn their back on the dollar and float a single currency, in doing so stopping their bulk purchasing of American Treasury bonds, the result could be an even sharper fall in the dollar.”
"The dollar's recent weakness has reinforced the arguments in favour of monetry union"
The article quotes an analyst from investment bank Dresdner Kleinwort as thinking that the GCC are coming from a much tougher starting point than the European countries who banded together to form the euro.
The dollar-pegged Gulf currencies are already running the risk of inflation, and that’s before the widely expected cut in US interest rates. They may be forced to mimic this cut, although Saudi Arabia surprisingly chose not to go down this route when the US Federal Reserve cut rates by half a percentage-point earlier in the year.
Observing how the GCC countries react to the Fed’s actions will tell us a lot about their true intentions. Watch closely.
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