Why Gulf Dollar Currency Pegs Survive Through Wars, Oil Shocks: QuickTake - Bloomberg

Why Gulf Dollar Currency Pegs Survive Through Wars, Oil Shocks: QuickTake - Bloomberg

Gulf Arab nations have pegged their currencies to the dollar for decades. There’s a reason for that: they reduce foreign-exchange risk for states in the region because so much of their revenue comes from oil, which is priced internationally in the U.S. currency. Periodically the mechanisms are tested, as they were in 2020 when a price war sent crude plummeting below $20 a barrel. With oil back around $100 in 2022, they appear to be in good shape, despite questions about the dollar’s role in the global economy.

1. Who has currency pegs and why?

The six members of the Gulf Cooperation Council -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates -- have been running currency pegs or managed foreign-exchange regimes since the 1970s and 1980s. Kuwait’s dinar tracks the value of a basket of currencies believed to be dominated by the dollar, while others are linked solely to the greenback. The pegs have helped to shield the region’s economies from the volatility of energy markets and allowed central banks to accumulate reserves in the good times. Those reserves, along with foreign assets held by the region’s sovereign wealth funds, are used in turn to defend the pegs.

2. What could put the pegs under stress?

Fixed exchange-rate regimes in Asia were swept away during the currency crisis of the late 1990s, when speculators forced the likes of Thailand and South Korea to abandon their links with the dollar. They’re now largely confined to the major oil producers in the Middle East along with Hong Kong, whose dollar has been pegged to the U.S. currency since 1983. The Gulf pegs mean local central banks often take a cue on monetary policy from the U.S. Federal Reserve, which creates the risk of policy misalignment when business cycles are out of step. Today, the Gulf region is grappling with heightened inflation and the prospect of global interest-rate increases led by the Fed. There is disquiet about global dollar dominance, and the U.S.’s willingness to use the dollar as a weapon in sanctions to punish Russia for its invasion of Ukraine.