US dollar the only cloud on the GCC economic horizon

With the G7 economic giants sitting down in Florida this week, the US dollar's sickness is back on the agenda. News that job creation in the US last month was well below market expectations sent the euro to $1.26 before this meeting opened.

The downside for the GCC is more expensive imports from Europe, the main source of many finished goods and heavy engineering for the region. In short, price inflation, as oil dollars will not buy as much.

On the other hand, there is a positive side. The low US dollar is great for inward bound tourism. Those Dubai five-star hotels which looked good value with the euro at 85 cents look outstandingly cheap now. Perhaps that is one reason why the hotels are full.

A low dollar is also a stimulus to local manufacturing and production. The obvious answer to expensive European products is to substitute local goods, and a lower dollar tips the investment equation in the right direction.

One more indirect impact of the dollar's decline is the way global financial markets are drifting sideways this year, unsure of how to respond.

GCC investors are therefore turning towards local alternatives. The UAE bourse is up 5% so far in 2004, and local real estate continues to boom.

So even if the G7 leaders fail to agree on measures to shore up the US dollar - and they might as well face it the US is not interested in putting up interest rates this side of a presidential election - then the weaker dollar is something that the GCC economies can live with and still thrive.

Moreover, thus far in 2004 high oil prices have more than compensated for US dollar weakness. And it will only be if this position changes in the second half, as some analysts believe, that the dollar's devaluation becomes a genuine threat to the economic health of the GCC.