GCC continues debate over dollar peg drop

As the GCC contemplates the use of a single currency, the debate over removing the peg to the US dollar continues. Rakaa Properties, a Saudi Arabian firm, is one of the companies that have added their voice to the call.

It appears as though the debate over whether or not the member countries of the Gulf Cooperation Council (GCC) should decide to de-peg their respective currencies from the falling US dollar, continues with added fuel from comments made by former US Federal Reserve chairman Alan Greenspan.

Five GCC nations in particular are actually pegged to the US dollar, Qatar, Oman, Bahrain, the United Arab Emirates, and Saudi Arabia. The sixth member of the GCC, Kuwait actually moved in July to delink from the US dollar, and is now linked to a basket of different currencies. The current issue, and general dilemma of any nation using a fixed exchange rate, often called a pegged exchange rate, is that while inflation is sky-high in the member countries of the GCC, their currency follows the interest rate cuts currently being implemented by the US Federal Reserve. The any country that pegs their currency to the US dollar is unable to sufficiently battle high inflation rates by increasing interest rates within their own borders.

This characteristic of using a pegged exchange rate particularly affects the property investment market since the uncontrolled inflation makes any real estate transaction less attractive, if at all given the actual and potential losses in property values due to the further weakening of the US dollar.

Alan Greenspan recently visited the region and stated, “It (depegging from the US dollar) is probably the most useful thing that can be done to stop the increasing influence of foreign assets on the monetary system and therefore the monetary base which is basically the major force in inflationary pressures.” He delivered this statement while attending the Abu Dhabi Corporate Leadership Forum.

At another conference that took place earlier in Jeddah, Greenspan conveyed that he thought that depegging would probably not completely ease the inflationary pressure, it would surely do so in a significant manner for the short term.
Pam Woodall, Asia editor of The Economist expressed to ArabianBusiness.com that it is no longer a viable option for any of the nations in the Gulf to keep their currencies pegged to the US dollar as the US heads further towards a recession. With such a straight line monetary connection, it seems as though the property investment and mortgage market issues in the United States is truly dragging down those same sectors within foreign countries pegged to the US dollar.