Debate over Gulf peg to dollar reignited - FT.com

The argument over whether the Gulf states should retain their peg to the dollar is in full swing again after the US lost its AAA credit rating from Standard & Poor’s, bringing a new round of volatility to currency markets.

One of the main focuses of debate is the way the weak dollar can increase the cost of imports on which Gulf states rely, driving up inflation.

“The peg worked well in the past with a strong US dollar, helping to anchor the GCC [Gulf Co-operation Council] economies and keep inflation low. However, this will not be the case if the outlook for the US dollar is weak,” says Monica Malik, chief economist at EFG-Hermes investment bank in Dubai. “If the GCC countries move to a more flexible currency policy, they will have increased monetary independence.”

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