Market sees new Opec price plan

Market sees new Opec price plan
By Babu Das Augustine, Banking Editor GULF NEWS Published: October 02, 2007, 00:12

Dubai: International banks and analysts have hinted at the possibility that Opec will switch the pricing of oil from the dollar to a basket of currencies as the greenback sank to a record low against the euro yesterday.

"If the dollar were to lose its lustre as a reserve currency this could prove disruptive to the global financial system. In the Middle East the market has become concerned that more countries would drop the dollar peg with Opec potentially changing the oil price to a currency basket rather than the dollar," Merrill Lynch said in a note yesterday.

The euro hit a new all-time high of $1.4283 in early Tokyo trade. By late afternoon it stood at $1.4260, down from $1.4266 in New York late on Friday.

With oil exports still priced in dollars and more than 80 per cent of the Gulf countries' reserves denominated in dollars, Gulf central banks have been been reluctant to drop their peg to the dollar.

"Rising oil prices have been serving as a hedge against the decline of the dollar and its impact on exchange rate losses. From the (Gulf) governments' point of view, there hasn't been any urgent compulsion to revalue currencies," said John Sfakianakis, Group Chief Economist at Saudi British Bank. International banks say the situation is changing fast in the context of the rapidly eroding confidence in the dollar as a reserve currency.

Conviction

"Our greatest conviction is that the dollar will weaken further against the yen and Swiss franc. One more worrying facet of the recent dollar weakness has been the market concern that more countries might drop the dollar peg," Merrill Lynch said in a note.

Earlier this year, Kuwait and Syria dropped their peg to the dollar in favour of a basket of currencies. In the context of mounting pressure on account due to rate losses and surging inflation, there has been widespread speculation that some of the Gulf countries including the UAE and Qatar would either revalue or depeg their currencies. Despite Gulf central banks insisting their commitment to the dollar peg, the currency markets witnessed frenzied speculative buying of the UAE dirham, which virtually forced the UAE Central Bank to cut its three-month CD (certificate of deposit) rate by 15 basis points.

Although the market has already factored in poor US jobs data, currency traders are waiting to see if the Fed will reduce interest rates again. The UAE and Kuwait cut their lending rates by 50 basis points and 25 basis points respectively, last month in response to the US rate cut, while others such as Saudi Arabia and Oman have yet to respond.

Economists said any further rate cuts could place Gulf central banks in a difficult position as the rate cut could fuel inflation and any reluctance to cut interest will fuel speculation in currencies. "The (Gulf) economies are experiencing a period of strong growth and ample liquidity. Lower nominal interest rates will provide further stimulus to inflation," said Monica Malik, an econ-omist with EFG Hermes.