Benoit Anne, Emerging EMEA FX Strategist, Merrill Lynch, told The Peninsula: "We think that the exchange rate regimes have come under severe pressures, especially in view of the sharp rise in inflation. There have been official comments from Qatari authorities in the recent past that hinted exchange rate policy is being discussed internally."
Merrill Lynch views Qatar as a "prime candidate" for regime change, along with the UAE.
Anne said: "There was a need to substantially tighten monetary conditions, one of the key reasons why we think the dollar peg is not sustainable. Already the monetary authorities in the region have tried to contain liquidity, without, for the moment, compromising the current exchange rate framework, as illustrated by the recent tightening of mortgage borrowing conditions in a number of countries."
Most of the GCC states have been retaining their currencies’ peg to the dollar out of a sense of loyalty. After all, the dollar has served them well in times past and most governments appear to be hoping the crisis will blow over.
Inflation is a continuing problem in the GCC, not least Qatar, where the inflation rate touched close to 15 percent earlier this year but has since been brought down to 13.7 percent through some gradual belt-tightening measures.
With the US Federal Reserve lowering interest rates, countries like Qatar have to follow suit because of the dollar link. This happens at a time when Gulf states are better served raising interest rates to fight inflation.
With oil prices hitting record highs, economies are growing at a rapid rate. Conversely,, the dollar is proving to be drag on currencies like the Qatari riyal which has led to a sharp rise in the cost of imports. Matters are not helped by the fact most goods and essentials are imported into the region.
However, a move away from the dollar would mean GC states have no confidence in the greenback, which would mean the US currency could further sink in value.
