Dollar refuses to rally; bring on GCC revaluations

So are we now facing a dollar recovery, or a dollar meltdown? That is the multi-trillion dollar question.

The pro-recovery argument is basically this: the US dollar has taken a big fall in the past couple of years, this now puts other currencies under pressure and it is their turn to correct now, pushing the dollar up in value. In addition, the US stock market should correct sharply when a recession is officially declared, causing a flight to cash and boosting the dollar.

On the other hand, the dollar negative argument is still strong: US property prices are crashing down - 9% in the fourth quarter - and the low interest rates needed to improve liquidity make the US dollar a poor currency to hold; it pays little interest and is losing value in a declining spiral; and just how long is a US economic recovery going to take, months or many years?

Precious metals

Better then to get out of the dollar and into something tangible like precious metals or stronger currencies. The dilemma for current holders of US dollars is that they do not want to ditch the dollar at the lowest point in the cycle, or hold on if things are going to get worse.

In this context the UAE central bank and its colleagues in Saudi Arabia, Bahrain, Oman and Qatar are acting as heroic contrarians in maintaining the value of their currency pegs. They must also be mindful of the political implications of deciding to fry the currency of their key ally. You do not hit your friends when they are down, unless you want to lose them.

However, there comes a point when even friends have to part and go their separate ways. And if the US dollar is about to collapse then the break would be best done soon.

On a day when commercial electricity prices in Dubai have just gone up by 65% nobody can be unaware that inflation is on the march, and that the policy response so far has not worked.

Revaluation

Governments may be powerless over some price changes, but as the former Chairman of the Federal Reserve Alan Greenspan reminded an audience in Abu Dhabi last week, revaluation is an appropriate and effective response to inflationary pressures. It is something that central banks can do as a one-off attack on inflation.

And given that Greenspan is one of the guilty men responsible for the current US economic sickness, perhaps he is somebody worth listening to when it comes to seeking a solution. Doing nothing condemns the GCC to higher rates of inflation than would otherwise be the case.

At the moment a vicious wages and prices spiral means that a 65% hike in electricity prices is unlikely to be the last major price surge. The need is to take immediate offsetting measures like revaluation, or some way down the road the UAE will end up with a bust like the one Greenspan has left as his legacy in the USA.

See also:
UAE waits for Saudi signal on revaluation
Gulf States close in on currency revaluation
Qatari Riyal needs 20 per cent revaluation to combat inflation