Currency Conundrums in the Gulf

Abstract

Historically, the US relationship with the GCC countries has been largely defined in terms of security and energy issues. However, in recent years the US dollar and its influence on the currency systems in the Gulf have taken on increased importance. For years the GCC countries have pegged their currencies to the dollar, setting their currencies at a fixed rate with respect to the dollar. This practice paid great dividends in helping the individual countries establish sound macroeconomic fundamentals, especially as defined in terms of low rates of domestic inflation. However, the system comes at the cost of precluding the use of monetary policy, particularly the setting of domestic interest rates that diverge from those in the United States.