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In the Gulf, the age of the petrodollar will not be ending soon

GCC currency pegs have provided stability for 40 years. The dollar remains the best bet for oil exporters

Deira souq, Dubai, in 1979. The late 1970s were a volatile period for energy markets Allan Hartley/Alamy
Deira souq, Dubai, in 1979. The late 1970s were a volatile period for energy markets

The GCC states bar Kuwait have pegged their currencies to the US dollar since the late 1970s. This was a period of exceptional volatility in the global energy market, beset by fractious Gulf geopolitics, rampant global inflation and major bank failures.

The oil-exporting monarchies of the Gulf wanted to insulate their domestic economies from external liquidity shocks, so it made sense to peg their currencies to the dollar.

The world’s primary reserve currency is also the medium of exchange for the world’s oil and gas market. Kuwait pegs its dinar to a basket of currencies, but the basket is heavily weighted to the greenback.

In addition, the $25 trillion US economy is the world’s largest and Washington DC is the primary security provider in the Gulf; world trade is transacted in dollars, and the balance sheets of the GCC’s sovereign wealth funds and central banks are predominantly denominated in the dollar.

Although dollar currency pegs have failed spectacularly during times of macro-economic stress in Thailand, South Korea, Lebanon, Argentina and Brazil, the GCC currency pegs have been beacons of stability in the $6.5 trillion-a-day turnover global foreign exchange market – a salient feature of the post-Bretton Woods international monetary order.

Only the Hong Kong dollar peg can match the GCC currencies’ four-decade pedigree.

The GCC pegs have survived several macro and geopolitical stresses in those years. Saddam Hussein’s Iraq invaded Kuwait in August 1990, but the Kuwaiti dinar did not succumb to speculative selling because the emirate’s central bank and sovereign wealth fund assets were all denominated in dollars.

The Gulf pegs have also survived three major oil shocks in the past decade: 2015, 2019 and 2020.

However, Saudi Arabia and UAE have recently joined the Brics. Here, China often talks about de-dollarisation and radical reform of the Bretton Woods institutions – the International Monetary Fund, World Bank and World Trade Organisation.

Dubai 1980: Deira clock tower with a 747 jet coming in to land. The city looks very different today, but some things remainAllan Hartley/Alamy
Dubai 1980: Deira clock tower with a 747 jet coming in to land. The city looks very different today, but some things remain

Yet the strategic value of the dollar peg has only increased for Riyadh and Abu Dhabi as they seek to attract foreign direct investment, develop domestic capital markets and play a pivotal role in global M&A deal making.

The truth is, there is no practical alternative for the recycling of Gulf petrodollars other than the vast US markets in treasuries, mortgages and corporate and offshore dollar debt.

No other fixed-income market in the world can remotely match Uncle Sam’s market in size, liquidity and depth.

Brexit was the kiss of death for sterling’s role as a global currency. Geopolitical realities preclude the Chinese yuan as a replacement to the dollar even if Beijing did not impose capital controls.

No other fixed-income market in the world can match Uncle Sam’s in size, liquidity and depth

The Japanese yen is a managed currency and the yen capital markets dance to the tune of the Ministry of Finance in Tokyo.

The euro survived an existential crisis in 2012 but Europe’s relations with the Kremlin are a sword of Damocles for its future stability.

I do not doubt that Saudi Arabia and UAE will price specific oil deals in yuan or Indian rupees but I cannot see any abandonment of the GCC currency pegs in the next decade and beyond – even though Gulf capitals have been concerned about Washington’s penchant for weaponising the dollar as an instrument of diplomacy.

The dollar peg does not come without cost to the Gulf economies. When the US devalues the dollar, inflation rises in the Gulf as the region primarily imports goods from Europe and Asia.

When the Federal Reserve tightens monetary policy, as it did in 2022, interest rates in the Gulf also rise – triggering stress in credit markets.

Speculators tried to bet on devaluations of the Saudi riyal and the Omani riyal in the 2020 oil crash, but Riyadh and Muscat did not blink.

The scale of Saudi financial firepower makes a Bahraini dinar devaluation highly improbable too.

The age of the petrodollar has not ended, thanks to the success of the GCC currency pegs.

Matein Khalid is the chief investment officer in the private office of Abdulla Saeed Al Naboodah and the CEO designate of a venture capital firm. He is also an adjunct professor of real estate investing and banking at the American University of Sharjah

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