Related: Government Green Lights Gulf Dollar Abandonment
U.S. Treasury Secretary Henry Paulson meets with counterparts from Saudi Arabia today on his first official trip to the Persian Gulf as investors foresee no immediate end to the regional currencies' link to the dollar.
Paulson arrived late yesterday on a four-day trip to Saudi Arabia, Qatar and the United Arab Emirates, where officials said he will stress U.S. openness to Middle East investment, dangers to economic growth from surging oil prices, and the fight against the financing of terrorism.
The visit offers the Treasury chief the opportunity of an update on the fixed exchange rates retained by most of the oil- rich nations in the region. Officials in April agreed to strengthen their efforts to establish a currency union by 2010, diminishing speculation on a quick change in the dollar pegs.
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``The peg has been agreed as a preamble to the formation of a monetary union and abandoning it now will further damage the credibility of the whole project,'' said Dorothee Gasser, a currency analyst at ING Bank NV in London.
Switching to setting rates versus a basket of currencies, rather than just the dollar, ``can't be done overnight'' from a logistical view, she said.
Forward agreements to acquire Gulf currencies have fallen as investors bet the nations, including Saudi Arabia and the U.A.E., will keep their pegs for now.
Traders' Bets
Contracts to buy U.A.E. dirhams in one year dropped to 3.59 per dollar yesterday, a 2 percent premium on the spot price of 3.6729, according to Bloomberg data. Twelve-month forwards for Saudi Arabia's riyal slipped to 3.7 versus the U.S. currency, compared with the spot rate of 3.7506. The forward rate has dropped from 3.7803 on Jan. 12, the highest this year.
``Currency decisions are sovereign decisions,'' David McCormick, Treasury undersecretary for international affairs, told reporters in Washington May 28. ``It appears that the peg in the Gulf states has served those countries well.''
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