Time for Gulf economies to rethink the dollar peg

Time for Gulf economies to rethink the dollar peg

While it can be argued that oil exports are denominated in US dollar and the dollar remains essential in any GCC exchange rate regime, trade flow analysis suggests that the yuan and the euro should not be ignored.. When exchange rates are prevented from adjusting in the face of unexpected capital inflows or outflows, adjustment can only take place through prices.. Norway for example, implements a crawling band against the US dollar to manage oil price fluctuations.. The problem with the peg is that GCC states are unable to utilise interest rates to manage the domestic economic cycle.. Following the 2015 oil downturn, GCC states would have benefited from continued low interest rates to boost economic activity US interest rates were on an upwards trend until late 2018.. Tying its currency to that of its main trade partners in Europe and Asia has allowed for better management of inflation, as the exchange rate adapts to movements in the three major currencies.. A basket regime would also enable GCC central banks to exert better control over interest rates and the domestic economic cycle.. Reforming the exchange rate regime in favour of a three-currency peg, for example, would require GCC states to