The Middle East and the Dollar

"If there's one message the Bush administration has been trying to hammer home to Chinese leaders, it is this: A major country with huge trade surpluses and rising prices should let its currency strengthen with market forces. So why is the administration nearly silent about the fixed exchange rates of Saudi Arabia and other Persian Gulf oil fiefdoms? ... Gulf newspapers and financial markets are rife with speculation that the Saudis, who have kept the riyal at 3.75 to the dollar since 1986, might set a new, higher exchange rate or otherwise loosen the link between the two currencies. ... There are good reasons for the Gulf Cooperation Council countries--Saudi Arabia, the U.A.E., Bahrain, Kuwait, Oman and Qater--to move away from the dollar. Inflation is high and getting higher in the region: almost 10% in Saudi Arabia, close to 15% in the U.A.E. and 9% in Kuwait. ... Already, the U.A.E. has frozen prices for bread, rice and other staples. Saudi Arabia is cutting tariffs on imported foodstuffs. ... Still, there is no consensus among economists about whether it is a good idea for the Saudis to do unto the riyal as the U.S. would have the Chinese do unto the yuan, ... Paulson may also be concerned that a shift in the Gulf's foreign-exchange policy might persuade markets that the smart money is losing faith in the dollar, sparking an even steeper decline in the currency even as the Treasury tries to put a floor under its fall", WSJ, 19 May 2008.

"Hedge funds and other investors made bundles of money in the 1990s betting currency pegs around the world would break. They are at it again, only this time they are gambling currencies will soar, not plummet. ... Art Steinmetz, who manages a $12 billion international bond portfolio at Oppenheimer Funds, likens currencies pegged to the dollar to bouyant rafts dragged underwater by a heavy boat anchor. ... Still, the money pouring into countries in anticipation of stronger currencies is causing inflationary pressures that policy makers can't ignore", WSJ, 27 May 2008.

This is absurd. If Hank Paulson (HP), "formerly" of Goldman Sachs (GS), wants a stronger dollar he should order Helicopter Ben to stop printing them. The UAE should follow the Phillipines and end price controls. They haven't worked for 4,000 years. As for the economists, what are they waiting for? See my 13 November 2007 and 9 and 12 May 2008 posts. I wonder if HP speaks to any of his old GS associates about commodity prices?

Eventually these pegs will break no matter what the world's finance ministers may say.