Stronger US dollar makes GCC revaluation safer

Global financial markets are living through turbulent times since the credit crunch of last August unleashed a tsunami of write-offs for sub-prime loans, and fears that recession will engulf the global economy.

Technical analysts have been surprised by the strength of the US dollar over the past two weeks, and many are now calling a reversal of the previous downtrend. This is an important change of direction in currency markets, if it proves correct, and probably reflects a tightening of global liquidity which is normally dollar positive.

At the same time hedge funds have been quick to sense this change, and have switched their bets on a dollar decline to a dollar advance in 2008.

Japanese sub-prime crisis

There are also rumors that the Japanese banks may have been the hardest hit of all by the sub-prime crisis, and will now have to reveal jaw-dropping write-offs in their annual results before the end of March. The pressure to unwind overseas positions and bring yen home will increase, and the currency will fall in value.

So what does this mean for the Gulf States and there ongoing deliberation over whether to revalue their currencies?

At first sight the message might be why bother now as the markets are revaluing the US dollar. But this would miss the point. The market's new direction is actually a great opportunity to reverse even more of the damage done to local inflation rates by dollar devaluation.

Revaluation in an improving environment for the US dollar means that the risk usually associated with it - basically the risk of increasing the decline in the dollar - is not present. Therefore a revaluation can proceed and be sure to be more effective than otherwise.

Revalue now

It is a one-off chance to offset the inflation spiral that has been building up in local economies, which is not helped by recent public sector salary rises. Moreover, if the US dollar is rising in value then the problem about having to keep on making new revaluations is also removed, as the upward trending dollar makes this unnecessary.

Of course, you do have to question whether this is just a US dollar rally before the resumption of a long-term decline, and trend reversal does not really help you to decide.

But we have seen the US dollar written off as dead many times in recent history only for the greenback to revive just as the magazine covers are carrying its obituary. Are we not just again learning that when the US catches a cold then the rest of the world gets pneumonia, and therefore the dollar emerges as the least-worst currency?

See also:
UAE revaluation confusion reigns
Revaluation next logical step to tackling UAE inflation
Kuwait 2008 economic outlook