Gulf Currency Peg Under Pressure

The UAE dirham has appreciated to a 17-year high as currency investors pile pressure on Gulf Arab dollar pegs, encouraged by a report that a revaluation could come as early next week. Central banks are trying to deter bets on appreciation. Kuwait, the only Gulf oil producer that tracks a currency basket, let its dinar fall in twice in one day and the UAE pushed down interest rates at an auction that guides inter-bank lending. Lower interest rates risk stoking inflation, which is at decade highs across the Gulf.

COMMENT: Although central banks are cutting interest rates to defend their pegs, I think markets will eventually give up and follow Kuwait's lead in unshackling their currencies from the dollar. This is an excellent preview for US might be in store for....focus should be on fighting inflation.