GCC likely to stand by US dollar

The dollar has another bad year in 2010 but as a new year dawns Gulf investors have little alternative in the currency war.

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The US dollar may have had a bad 12 months last year but Gulf investors do not have many alternatives amid global currency turbulence.

The greenback slid 2.5 per cent last year against other currencies but analysts say this year the euro may be the next victim if the European sovereign debt crisis worsens.

The retention of currency pegs to the dollar will also mean it makes sense for the Gulf to leave oil revenues in dollars. But other countries may increasingly diversify their foreign assets next year.

"There will not be an actual sell-down of the dollar but we will see countries looking to diversify out of the dollar into new reserves," said Shady Shaher, the MENA region economist at Standard Chartered.

"For the GCC, many reserves will still remain in dollars."

Global debate about the dollar's status as a reserve currency has intensified after a tough year for the currency.

Last year's drop in the dollar came after a 10 per cent decline in 2009, according to the Bloomberg Correlation-Weighted Indexes, which tracks the dollar against a basket of international currencies.

Dollar weakness has serious implications. Nearly two thirds of global reserves, including much of the GCC's oil revenues, are denominated in dollars.

Longer-term, economists predict moves away from the dollar as US dominance of the world economy wanes. China has already bought Japanese bonds and indicated a willingness to purchase Greek debt.

"2011 will not be a dramatic shift from the dollar but there will be some elements evident," said Fabio Scacciavillani, the director of macroeconomics and statistics at the Dubai International Financial Centre Authority.

However, experts are more upbeat about the fortunes of the dollar against other major currencies this year.

A strengthening US economy is forecast to outflank Europe and Japan, attracting investors to the dollar. In contrast, concern is rising that the euro may be weighed down if the euro-zone members Portugal and Spain eventually require bailouts.

Likewise, analysts expect the yen to weaken this year because of a sluggish Japanese economy and a large public debt.

The yuan is anticipated to rise to help control inflation in China after a dispute last year with the US over its value.

But the yuan is still not considered a viable alternative to the dollar as a reserve currency. China and other rising powers are not yet seen as ready to absorb the US$9 trillion (Dh33.05tn) of reserve assets held around the worl.