The United Arab Emirates will keep its currency peg to the US dollar even after Standard & Poor's downgraded the world's biggest economy and Oman sees no risk in investing in US treasuries.
Gulf central bankers were huddled in separate meetings on Sunday to discuss the downgrade, sources said.
All Gulf Arab states, except for Kuwait, peg their currencies to the greenback and their fortunes are closely tied to US developments. Gulf States are also major investors in US treasuries. "We are pegged to the dollar and will keep it. We don't see the dollar collapse. Because the problem is not in the US only, but also in the European markets," Mohamed al-Tamimi, deputy executive director at the UAE central bank's treasury department, told Reuters.
Ratings agency S&P cut the US long-term credit rating by a notch to AA-plus in an unprecedented blow amid concerns about the nation's budget deficits and climbing debt burden. It called the outlook "negative," signaling another downgrade is possible in the next 12 to 18 months. Tamimi said the downgrade was not unexpected but its timing was earlier than anticipated.
The Central Banker lent verbal support to the US on Sunday, saying there was no alternative to investing in the U.S. market which still remained "the most liquid and a safe market". The UAE central bank does not hold any US treasury bonds or government financial instruments, it has announced in July. "But if the yields go higher to a justified level, there is no reason why we will not invest in U.S. treasuries," Tamimi said. Kuwait is the only Gulf country which uses a currency basket as a peg, though heavily dollar-weighted. It dropped the dollar peg in 2007 in a bid to rein in inflation. Central bank officials in Saudi Arabia, Kuwait and Bahrain were not immediately available for comment.
The world's largest oil exporting region has an 'established culture' in favour of the greenback, said National Commercial Bank Chief Economist Jarmo Kotilaine in Riyadh. "But we are at an inflection point in that this is causing people to question the role for the dollar and the fundamentals of the U.S. economy," he said. "The road will take us where the dollar's role will be reassessed." Group of Seven finance leaders were set to discuss the twin issues in a conference call.