QNB economic commentary: assessing currency pegs in GCC

05/12/2015 (The Peninsula – Qatar): Doha: For decades, five countries in the Gulf Cooperation Council (GCC) have kept their currencies pegged to the US dollar. Only Kuwait links its currency to a basket, but even this is believed to be heavily weighted towards the dollar. However, the recent sharp decline of oil prices has fueled speculation in the currency forward markets about possible devaluation of GCC currencies. These bets are likely to be misplaced for two reasons. First, the peg makes economic sense given the structure of GCC economies. Second, there is political will and ample resources in the GCC to maintain the peg.To appreciate the virtues of the peg, it is instructive to think about what would have happened if the GCC had been running a free-floating exchange rate regime. Under that scenario, the decline in oil prices would have led to a depreciation of local currencies. This has happened to major oil exporters like Brazil and Russia, whose currencies fell by 71% and 88% respectively against the US dollar since mid-2014. Even other oil exporters who are less reliant on oil such as Canada and Norway experienced large depreciations of their currencies (25% and 42% respectively over the same period)…





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