Unpegging The US Dollar

Posted on Di 04 Dezember 2007 in misc • 2 min read

After I posted a video link about the Inevitable Collapse of The Dollar, the Economist puts a story about the recent [[USD]{.small-caps}[]{.push-single}[’]{.pull-single}s decline on the front cover](http://www.economist.com/opinion/displayStory.cfm?Story_ID=10215040) of their December[]{.push-single} [’]{.pull-single}07 edition. If you’re a front cover contrarian, like me, you’d be loading up on [USD]{.small-caps} right now but I’m not. If you follow the Forex markets, you’d be seeing a rally of sorts happening in the [USD]{.small-caps} right now. Relative to the major currencies the [USD]{.small-caps} is up but to Gold its remaining stable. My guess is that this[]{.push-double} [“]{.pull-double}rally” will be short lived, especially if Middle Eastern countries like Saudi Arabia, Qatar, Oman, and the United Arab Emirates decide to unpeg their currencies to the [USD]{.small-caps} this Friday.

I support unpegging all currencies relative to the [USD]{.small-caps} because it promotes free market trading for both parties, but the dilemma in this case is that doing so will hurt the [USD]{.small-caps} and Middle Eastern currencies in the process. In the likely event that they do unpeg their currencies you’d see an immediate decline in the [USD]{.small-caps}. The reason for this devaluation of [USD]{.small-caps} is simple, the Middle Eastern states will no longer need to buy [USD]{.small-caps} to keep their pegs stable and a portion of its demand dries up.

Unpeging though does present a problem for the unpegger, it’ll cause Middle Eastern currencies to revalue and that could slow their economies and exports. No country wants their economies to slow so the likely recourse for them would be to[]{.push-double} [“]{.pull-double}tie” their currencies to a weighted basket of currencies, which will probably be largely comprised of Euros. However, as a Times [UK]{.small-caps} Online article alludes to, these Middle Eastern countries could be setting the stage for a single Middle Eastern currency. Thanks to Jo for the link.

Economists and Middle East experts are split over whether the Gulf nations will opt to act this week, revaluing their currencies or scrapping the dollar pegs in favour of a link to a basket of foreign currencies.

Whether the nations are likely to act collectively or individually is also unclear. Analysts believe that the [GCC]{.small-caps} states (ed. Gulf Cooperation Council), which hope eventually to set up a single currency and may this week give further details of those plans, may well want to show unity. [via Times Online]

I wonder what that currency would be called? The Oilo? The OPECero?