An interesting short article by an ifr markets analyst from last week on the potential effects of a single Gulf Cooperation Council currency.
Do Unified GCC Plans Pose The Single Biggest Risk To The USD?
Friday, September 19, 2008 2:50:00 PM
London, Sept 19. This week we have seen a host of fresh factors impact currency markets. However, early in the week we saw the US Dollar hold up reasonable well despite the swathe of seemingly negative news. The latter stages of the week has seen the USD fair less well but we are yet to witness the mass sell-off that many had initially feared upon return to work at the beginning of the week.
Liquidity and funding remain the biggest short-term concerns for those who remain active in the market and this despite the Thursday news of coordinated Dollar injections. These liquidity adds are aimed at soothing short-term concern and knee-jerk reactions that tend to exacerbate the situation.
However, this week has also seen one notable event pass largely unnoticed. This author is of the opinion that the GCC meeting in Jeddah presents the US Dollar with what is arguably the single greatest risk for future directionality.
With events in the US taking centre stage the meeting in the Middle-East to decide the fate of the united Gulf currency has managed to stay well below the radar. The Gulf Cooperation Council (GCC) met this week to deliberate and ratify the plans for a move towards united Gulf currency unit. What many have affectionately named the Sultan is more widely referenced as the Gulf Standardized Unit or GSU. The creation of a unified and freely floated GSU is hoped to free up the Gulf reliance of the Dollar and this will in turn move the entire market away from the use of the Dollar as a de facto clearing currency.
This week the US government and the Fed have committed themselves to selling huge amounts of UST”s for the foreseeable future but if a 2010 formation of a GSU moves the market dependence away from the USD then this will severely weigh on the United States ability to finance and re-finance the bail-outs and quasi-nationalizations seen this week. However, this debt is being underwritten under the assumption that the United States Treasury will be able to sustain the market appetite for US debt related products. A dangerous assumption in our view as the fundamentally flawed and financially challenged US economy is unlikely to fund itself indefinitely to the degree we currently see.
As a result, it will be the emergence of a unified Gulf currency that forces the issue. Once the currency is born, oil prices will have a natural gravitation towards being priced in local currencies and although most expect some degree of Dollar peg initially, the gradual move towards a managed appreciation will intensify the pressure on the US unit and may ultimately shift the global balance of payments away from its current Dollar bias. For this reason the Gulf and the potential of the Sultan cannot be ignored. Matthew.Foster- Smith@ThomsonReuters.com
