Gulf States are set to follow former Fed chairman Alan Greenspan's advice and dump their dollar peg following a benchmark meeting tomorrow, with analysts predicting a slow but deliberate creep away from the greenback rather than an imminent decoupling, a move that could have devastating consequences for the American economy.
Pricing assets in accordance with the plunging dollar has caused crippling inflation in Qatar and the United Arab Emirates, who are laboring under rates of 14 percent and 10 percent respectively, leading Merrill Lynch to predict that Gulf states would revalue their currencies relative to the dollar or de-peg.
"Pressure is mounting on central banks in the Gulf to fight surging inflation when they meet on Wednesday by severing the link between their currencies and the tumbling US dollar," reports the London Times today.
Deutsche Bank also predicts that Qatar and the UAE will follow Kuwait's example and ditch the dollar peg at some point this year.
“The currency peg with the dollar worked well while both economies were moving in the same direction. Now, these two economic blocks are moving in completely opposite directions and it no longer makes sense,” Zahed Chowdhury, head of Middle East research in Dubai for Deutsche Bank, said.
HSBC also speculated in an October report that the UAE and Qatar would abandon the dollar sooner rather than later.
"Human resources are becoming scarce. Supplies are becoming scarce. De-pegging would help a great deal," Khalil Sholy, the president of Qatar's United Development Company told the London Times.
Investors are already abandoning the ailing greenback in droves and instead buying local currencies, according to the Times report.
Despite Saudi Arabia's best efforts to discourage the de-peg, a gradual creep away now seems inevitable.
Reyadh Faras, an economics professor at Kuwait University, told Business Week that Kuwait's decision last May to abandon the dollar was significant and similar decisions by even larger countries could seriously erode the dollar's value.
"If large countries like Saudi (Arabia) take the same step, its psychological effect will precede its actual one and it could lead to losses for the dollar," he said.
Greenspan encouraged Gulf states to abandon the dollar during the Abu Dhabi Corporate Leadership Forum last month.
The former Fed chairman's zeal to destroy the dollar is evident in numerous public statements he has made predicting the replacement of the greenback with the Euro as the world reserve currency.
Greenspan has repeatedly badmouthed the dollar and hyped the inevitability of economic chaos at a time when market confidence is in the toilet. Greenspan's rhetoric matches that of the IMF, who in October of last year bizarrely slammed the dollar as "overvalued" at the same time the greenback hit its all time low against the Euro.
A decision on behalf of the Gulf states to abandon the dollar peg would have disastrous consequences for the greenback and the American economy.
Such a move could lead the likes of the United Arab Emirates and Saudi Arabia to diversify their foreign exchange holdings out of dollars. This would amount to a vote of "no confidence" in the dollar and may cause other countries with large dollar reserves, such as China and Japan, to follow suit and begin dumping the greenback en masse.
China has threatened repeatedly to use the "nuclear option" and liquidate its vast holding of US treasuries in response to continued pressure on the Communist state to force a yuan revaluation. According to a widely-read London Telegraph report, such an event "could trigger a dollar crash" and also "cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession."
Runaway inflation would also ensue, making the cost of living unaffordable to even middle class Americans as food prices skyrocket and international aid organizations like the World Food Programme predict rationing and food riots.