Wealthy Nations In Gulf Rethink Peg to Dollar

WSJ ^ | 11.20.07 | JOANNA SLATER and CHIP CUMMINS

[BurbankKarl]

For many years, oil-rich Persian Gulf states have pegged their currencies to the dollar. Now that link is stoking a bad bout of inflation in their red-hot economies and putting policy makers in a dilemma: Break the dollar peg and risk undermining the U.S. currency, or keep it and face growing local discontent.

The dollar peg has "served the economy...very well in the past," said Sultan Nasser al-Suweidi, the governor of the United Arab Emirates' central bank, last week. "However, we have reached a crossroads."

Because countries such as the UAE, Saudi Arabia and Qatar sit on large reserves of U.S. dollars, their decisions will have repercussions beyond their borders. If they move away from their strict dollar pegs -- perhaps following Kuwait, which earlier this year switched to a basket of currencies -- it could undermine demand for dollars and encourage others to diversify their holdings. Many nations have already created sovereign wealth funds to invest their holdings in a broader array of assets.

The Persian Gulf nations originally tied their currencies to the dollar to stabilize their revenue from oil, which is traded in dollars. Also, some nations had little central-banking expertise and found it easier to tie their monetary policy to that of the Federal Reserve in Washington.

Now, however, the Fed is cutting rates to prop up the slowing U.S. economy and forestall damage from the U.S. housing downturn. That's precisely the wrong prescription for economies trying to tame galloping growth, such as those in the Persian Gulf.

[BurbankKarl]

Maybe they will pick up some Liberty Dollars to diversify!

[neb52]

The FBI just raided and confiscated Liberty Dollar last week. Took all the gold and silver that backed the currency. They also took several tons of new paper currency with Ron Paul’s face on them.

http://www.courierpress.com/news/2007/nov/15/liberty-dollar-office-raided/

[x_plus_one]

Now, however, the Fed is cutting rates to prop up the slowing U.S. economy and forestall damage from the U.S. housing downturn. That's precisely the wrong prescription for economies trying to tame galloping growth, such as those in the Persian Gulf.

This description of US linkage to Arab economics is intellectual whiplash at the very least....Fed action on interest rates is too little too late. The housing bust is in full swing. Let the Arabs dither and dance - they don't make anything - just trouble.