INFOS

GREENBACK’S DECLINE PROMPTS TALK OF CENTRAL BANK RESERVE DIVERSIFICATION AND ENDING PEGS TO DOLLAR
CORPORATE FINANCING FOCUS

The shifting sands in the foreign exchange market in 2007 undermined the dollar to the extent that China openly weighed what its state media refer to as the “nuclear option” of dropping its vast holdings of US securities if Washington were to impose trade sanctions to force a quicker revaluation of the yuan. A weak dollar is not in the best interests of US creditors, who will be paid back in cheaper greenbacks.

Meanwhile, Jassem Al-Mannai, chairman of the Arab Monetary Fund, based in Abu Dhabi, UAE, recommended that members of the Gulf Cooperation Council end their currency pegs to the dollar to give themselves more flexibility to combat rising inflation. He suggested that the GCC countries peg their currencies to a basket of currencies, including the euro, the British pound and the Japanese yen, or shift to a managed float.

The GCC declined to follow Al-Mannai’s advice at its summit meeting in Doha, Qatar, in December, with Saudi Arabia adamant about maintaining the current system. The dollar’s role as the world’s leading reserve currency, however, is looking less secure.

“Continued talk of repegging and revaluations is a reminder of the global impact of the decline in the value of the dollar, causing central banks and sovereign funds to rethink their positioning regarding reserve accumulation, currency regimes and oil pricing,” says Ashraf Laidi, chief foreign exchange analyst at New York-based CMC Markets US. “Such comments from China have been a veiled counter threat to the growing protectionist rhetoric by Democratic presidential candidates and the US Congress calling for restrictive legislation against China in the event that Beijing didn’t revalue its currency,” he says.