Gulf forex union delay raises revaluation risk

 

 

Gulf Arab oil producers are more likely to revalue their dollar-pegged currencies unilaterally the longer plans to introduce a single currency are delayed, US investment bank Morgan Stanley Co said.

 

Saudi Arabia, the UAE and four other members of the Gulf Cooperation Council (GCC) are likely to miss a 2010 deadline for a single currency by five years, Morgan Stanley said in a report.

 

The GCC also includes Qatar, Kuwait, Oman and Bahrain.

 

"The longer the union is delayed, the more tempted and likely some Gulf members will be to contemplate making adjustments to their policy regimes," the bank said.

 

"Our best guess at this point is that the project will either have to be postponed to 2015 or that only a small subset of the six Gulf members will form the initial common currency area," it said.

 

Gulf oil producers could choose to retain their dollar pegs and revalue their currencies as the US Federal Reserve continues to cut interest rates and as inflationary pressures rise, Morgan Stanley said.

 

The states supplying a fifth of the world's oil are struggling to contain near-record inflation because the dollar pegs force them to track the Fed in easing interest rates as the US seeks to ward off recession, while their own economies surge.

 

"Step revaluations, while still retaining the dollar pegs, will remain a risk, particularly for the small economies within the Gulf," Morgan Stanley said.

 

Policymakers across the Gulf have said a 2010 deadline to create a single currency would be difficult, if not impossible. Oman has ruled out altogether joining monetary union, its central bank governor told Reuters last week. (Reuters)