Impact and Future of Arabian Currencies Linked with Us Dollar

Impact and Future of Arabian currencies linked with US Dollar

The US dollar has hit fresh lows against the euro, yen and other major currencies including and looks set to weaken further in the year ahead.

Dollar weakness has been the overriding trend in currency markets this year. its expected to dominate for at least another year until the US current account deficit is brought down to more sustainable levels.

Since the Gulf currencies are pegged to the US dollar, as the dollar declines in value so do they. The dirham, dinar and riyal have all touched fresh lows against the major currencies. The dollar's fall and future direction will have an important impact on all the Gulf economies.

The most visible impact of a weaker dollar in the region has been in the increase in the price of imported goods. The Gulf imports the majority of its goods from Asia followed by the Eurozone. The US only accounts for 13% of the Gulf Co-Operation Council's total imports. Higher prices raise costs for importers and reduce the spending power of Gulf consumers. Sectors already facing supply squeezes, such as construction materials, have been particularly hard hit. Global competitive pressures, the open nature of the Gulf economies and the relative ease with which local companies can switch to lower cost suppliers will prevent runaway inflation, but consumers will need to prepare for higher prices next year.

As well as increasing the cost of certain imported goods a weaker dollar also reduces the relative value of US investments and assets. This of course can be offset by capital gains if the assets rise in value. Although regional assets are also falling in foreign currency terms, the relative outperformance of the local stock markets has easily compensated. Some evidence suggests that the dollar's fall has accelerated the trend of regional investors repatriating money out of the US and instead bringing it home. The Bank of International Settlements reported that Gulf and other OPEC investors repatriated USD 13bn in H1 2003, more than twice the total amount for 2002.

OPEC has certainly become concerned about the dollar's fall. Indeed the US dollar's decline is one of the reasons's why dollar denominated oil