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Countdown to lift-off

The Economist
Gulf countries are rethinking their currency pact with the dollar

HARDLY a week goes by without a new reason to be gloomy about the dollar. The latest scare is that members of the oil-rich Gulf Co-operation Council (GCC) might loosen their links to the greenback, depriving the foreign-exchange markets of a reliable buyer of the troubled currency.

The United Arab Emirates (UAE), through its central bank governor, recently hinted that it would like to free itself from the dollar peg, but would prefer to do it in concert with the other GCC members-Saudi Arabia, Kuwait, Qatar, Oman and Bahrain. Last May Kuwait broke ranks and decided to track a basket of currencies. Since then, the Kuwaiti dinar has risen by nearly 5% against the dollar.

Now others might follow Kuwait’s lead. Someone close to the GCC says that some members are advocating a substantial revaluation-perhaps by as much as 20-30%-if the dollar’s slide continues. Another option being talked about would be to link the Gulf currencies to euros as well as dollars, with up to half the basket in the European currency. Further discussions will take place at a council summit on December 3rd and 4th. Futures markets are already pricing in a slight loosening of the dollar peg-though the UAE’s central bank sought to quell speculation on November 22nd by cutting short-term interest rates.

The immediate problem for the Gulf states is that the inflationary effects of the oil-price boom are being amplified by their yoke to a weakening currency.
(22 November 2007)

New: concern trolling the euro

Jerome a Paris, Daily Kos

Becoming the world’s principal reserve currency might not be worth the bragging rights.

Thus concludes a surreal column in the Financial Times this morning, which purports to explain that eurozone countries should really not wish to have the euro become the dominant currency, because it’s really, really bad…

I’ll have a few extracts below the fold, but I’d like to note that the mere publication of such a column is relevant information: the move towards the euro as a dominant currency is no longer something inconceivable, it’s no longer an idea to be mocked as preposterous or silly – no, it now needs to be fought actively, to make it less momentous that it would be, less attractive to the potential beneficiaries, and thus less significant.

Which means of course that this momentous, attractive and significant event could be on the verge of happening.
(27 November 2007)

Ecuador’s Correa:To Push OPEC To Switch To Stronger Currency

Dow Jones via FXStreet
Ecuador will continue defending a proposal that the Organization of Petroleum Exporting Countries should uses a stronger currency than the U.S. dollar for its transactions, President Rafael Correa said Wednesday.

“This is an Ecuadorian thesis. Venezuela, Iran and other countries had supported it and we will defend our proposal,” Correa said at a press conference after returning from a trip to Saudi to Arabia, China and Indonesia.
(28 November 2007)

Facing up to the falling dollar

Donald J. Boudreaux, Christian Science Monitor
Don’t panic just yet. But watch out for Washington’s attempts to ‘rescue’ the dollar.

What do Venezuela’s Hugo Chávez, Iran’s Mahmoud Ahmadinejad, and rap mogul Jay-Z have in common? They’ve all recently dissed the US dollar. And for good reason. Seven years ago, a euro would set you back as little as 84 cents. Today, it takes a whopping $1.49 to buy a euro. The trend line with respect to other currencies is similarly negative.

The precipitous drop in the dollar’s value has set off alarm bells around the globe. Will China dump its massive hoard of dollars? Will OPEC stop trading oil in greenbacks? Will Persian Gulf states break their peg to the dollar? How low will the dollar go?

The response to all of these concerns is this: Be afraid, but not very afraid. Yes, the dollar’s fall makes Americans poorer. It also reflects concerns about the health of the US economy. But so long as policymakers refrain from greater protectionism, foolish regulations, and loose monetary policy, the US economy and currency won’t become second-rate.

The consequences of the greenback’s decline are serious but manageable. The causes are more worrisome.

…But if America turns inward – if it reverts to the mistaken faith in protectionism, higher taxes, and command-and-control regulation – investors will continue to flee the US economy. They will do so in such numbers that, over time, America will become a second-rate economy with a second-rate standard of living. Then it won’t be just America’s enemies and rappers who’ll dis the dollar.
Donald J. Boudreaux is chairman of the economics department at George Mason University.
(28 November 2007)
The conventional view from mainstream economists. -BA