Unravelling the myths of the GCC dollar peg

Despite the global financial chaos, the US dollar has come through the turmoil surprisingly well. A resilient dollar may be what GCC central banks are praying for after being pressured by analysts and market participants for possible currency revaluations in the first half of 2008. Much has been discussed on this issue of late, and despite the negative consequences arising from the dollar pegs, Gulf central banks (except Kuwait) remained firmly committed to the fixed exchange rate regime. From time to time the proponents (in particular the GCC central banks) have provided several compelling justifications in favour of the existing dollar peg. The goal of this column is to revisit the three most proposed explanations for the GCC dollar pegs. First, proponents argue that fluctuations by the domestic currency will result in... [read full story]