How will the weak US Dollar affect the economies of the Gulf states? (page 1 of 2)

The dollar has come under repeated attacks over the past six months, hitting a 15-year low against the Japanese yen on October 25. Earlier this month waning consumer sentiment left the dollar at an eight-and-a-half-month low against the euro, and while the European single currency was pegged back briefly, the dollar's decline has since resumed.

On October 25 investors interpreted a G20 agreement to shun competitive currency devaluations, as a green light to resume dollar selling, and the US currency is expected to remain under pressure due to market expectations for the Federal Reserve to unveil a second round of quantitative easing as early as November.

Prospect of raised GCC inflation levels

The dipping dollar has inevitably raised the prospect of inflationary pressure in the Gulf. And it's an unwelcome phenomenon that is nevertheless quite familiar to consumers in the region: in 2008 inflation in the GCC peaked at more than 10%, before dropping to a more manageable 3.2% last year.

"The Gulf is a very heavy food importer and we're already seeing an impact on the price of food across the region," Nancy Fahim, an economist at Standard Chartered bank, warns AMEInfo.com. "The food components in the CPI basket are all trending higher, and we expect that to carry on for the rest of the year."

But while there's no doubt that the cost of non-dollar imported goods will rise, some analysts say that increase is unlikely to be passed on to consumers in markets such as the UAE, where economic recovery is still in its early stages.

"It obviously affects import prices and we've seen food prices rising in Saudi Arabia, but elsewhere prices remain pretty much under control in the GCC," Mark McFarland, Emerging Markets Economist at Emirates NBD, tells AMEInfo.com.

"Most of the suppliers are not listed equities so you don't really have access to details on their margins, but in periods when demand is weak, pricing power for distributors and retailers would be limited," he continues.

"There would be margin compression where the higher prices have to be absorbed by the distributor, and there is less opportunity to pass them on, particularly when it comes to necessity goods."

The IMF agrees with McFarland's assessment, and last week predicted that any rise in inflation would be minimal compared to the soaring increases seen before 2009.

"The inflation rate across the GCC is not near worrying levels," said Masoud Ahmad, Director of the IMF's Middle East and Central Asia Department. "We can expect some increased inflation with new capital flows and potentially some increase due to the increase in costs of imports as the dollar declines, but we are not headed towards inflation rates we saw two years ago."

US Dollar tipped for European currency fightback

Pundits' confidence is boosted by the belief that the dollar does not face a prolonged slide into the abyss. Currencies in Asia are likely to continue to rise against the greenback, on the back of capital flows and strong trade growth, but the dollar is tipped to fight back against European currencies.

"People talk about the weakening dollar as though it's a permanent state of affairs; it isn't," insists McFarland at Emirates NBD.