The GCC currency regimes are coming under the spotlight. There is increasing pressure for change as a result of rising inflation and a growing international call for imbalances to be addressed. Over time, we estimate that the region’s currencies need to appreciate by 37% in order to reduce their excess savings.
In the shorter term, we estimate that the UAE or Qatar will move to peg to a basket of currencies this year. We currently hold a long AER, KWD vs. short USD position in our discretionary portfolio. Moves to tighten policy also have global implications. In tandem with policy tightening elsewhere, this should place carry trades under pressure. The moves would be generally USD-negative.
Merrill Lynch, Global FX Strategist Report, July 2007