The United Arab Emirates or Qatar may drop their currencies' pegs to the dollar within six months as inflationary pressures outweigh the benefits of maintaining the links, Merrill Lynch & Co said.
"We believe there is a significant risk of a change in the policy regimes of either the UAE or Qatar in the coming six months," Merrill Lynch said in a research note published yesterday.
"Speculation pressure on other members of the GCC will remain and we expect Kuwait to maintain constant appreciation against the dollar."
Kuwait dropped the dinar's peg to the dollar May 20, citing inflationary pressure from European imports, prompting speculation that its Gulf Arab neighbours including Saudi Arabia and the UAE might follow. The Saudi riyal has been trading near 20-year highs since Saudi Arabia, Oman and Bahrain chose not to follow the Federal Reserve's half-point rate cut.
The central bank governors of Qatar, Oman, Bahrain and Saudi Arabia have all said a number of times since May that they have no plans to drop their currencies' pegs to the dollar.
UAE Central Bank Governor Sultan bin Nasser Al Suwaidi said repeatedly that any change will be coordinated with other Gulf states.
All six of the Gulf Cooperation Council countries followed the Fed's quarter-point cut on October 31. Reducing interest rates is inflationary at a time when the Gulf states are battling to control price increases as their economies boom on record oil prices.
Saudi inflation: Saudi Arabia's inflation rate in September rose to 4.9 per cent, its highest in at least five years. Saudi central bank Governor Hamad Saud Al Sayari said yesterday that accelerating consumer price growth is the "biggest challenge" facing the economy.
Inflation rose to a record 9.3 per cent in the UAE last year, while in Qatar price growth slowed to 12.8 per cent in the second quarter from 14.8 percent in the first quarter.
"Attempting to control inflation through monetary policy at the same time as retaining currency stability is not sustainable in the long-term," Merrill Lynch said in yesterday's note. "If there are higher interest rates in the pegged country then speculative funds will flow in as an attempt to arbitrage the difference." Source
"We believe there is a significant risk of a change in the policy regimes of either the UAE or Qatar in the coming six months," Merrill Lynch said in a research note published yesterday.
"Speculation pressure on other members of the GCC will remain and we expect Kuwait to maintain constant appreciation against the dollar."
Kuwait dropped the dinar's peg to the dollar May 20, citing inflationary pressure from European imports, prompting speculation that its Gulf Arab neighbours including Saudi Arabia and the UAE might follow. The Saudi riyal has been trading near 20-year highs since Saudi Arabia, Oman and Bahrain chose not to follow the Federal Reserve's half-point rate cut.
The central bank governors of Qatar, Oman, Bahrain and Saudi Arabia have all said a number of times since May that they have no plans to drop their currencies' pegs to the dollar.
UAE Central Bank Governor Sultan bin Nasser Al Suwaidi said repeatedly that any change will be coordinated with other Gulf states.
All six of the Gulf Cooperation Council countries followed the Fed's quarter-point cut on October 31. Reducing interest rates is inflationary at a time when the Gulf states are battling to control price increases as their economies boom on record oil prices.
Saudi inflation: Saudi Arabia's inflation rate in September rose to 4.9 per cent, its highest in at least five years. Saudi central bank Governor Hamad Saud Al Sayari said yesterday that accelerating consumer price growth is the "biggest challenge" facing the economy.
Inflation rose to a record 9.3 per cent in the UAE last year, while in Qatar price growth slowed to 12.8 per cent in the second quarter from 14.8 percent in the first quarter.
"Attempting to control inflation through monetary policy at the same time as retaining currency stability is not sustainable in the long-term," Merrill Lynch said in yesterday's note. "If there are higher interest rates in the pegged country then speculative funds will flow in as an attempt to arbitrage the difference." Source
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