Dollar Under Pressure as Gulf Nations Mull Break With Peg

Includes: UDN, UUP
by: SA Eli Hoffmann

The U.S. dollar fell against the euro and yen after a group of oil-rich Persian Gulf nations that have until now pegged their currencies to the U.S. dollar said they are mulling a change since the dollar's sudden drop has them concerned about inflation and reduced buying power. "The U.S. dollar is weaker across the board on the talk of a move away from the dollar peg," RBC Capital Markets analyst Sue Trinh said (Bloomberg). The dollar peg "served the economy... very well in the past," United Arab Emirates' central bank governor Sultan Nasser al-Suweidi said. "However, we have reached a crossroads." Countries like UAE, Qatar and Saudi Arabia, besides pegging to the dollar, also hold large caches of the currency. A decision to move from a dollar peg to a currency basket, such as Kuwait did in May, could encourage other countries with large dollar holdings to diversify, weakening demand for the greenback. Due to Saudi's close ties with the U.S., it is less likely to make such a move; last week it vetoed an OPEC push to mention dollar concerns in the cartel's post-meeting statement. Further U.S. interest rate cuts, a likely scenario, while helping ease downward pressure on the domestic economic slowdown, could push the dollar further down and boost inflation in oil-rich Persian Gulf nations that would otherwise see their local currencies rise on the tails of sky-high oil prices, thereby moderating inflation. Similar challenges are also faced by countries like China, whose yuan is closely tied to the dollar, Ukraine, and Ecuador, which doesn't have its own currency (Wall Street Journal). "The dollar peg is doomed," Jim Rogers, former George Soros partner said. PowerShares ETFs UUP (dollar bullish) and UDN (dollar bearish) are one way for investors to bet on dollar movement.

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