Gulf Arab oil producers preparing for monetary union should reconsider a policy of keeping their currencies pegged to the weak dollar and look instead at a basket of currencies, an Abu Dhabi government body said.
Saudi Arabia, the United Arab Emirates and three other states in the world's biggest oil-exporting region have agreed to keep their dollar pegs intact until they achieve a single currency by an increasingly unlikely 2010 deadline.
But as oil prices soar, the dollar tumbles to record lows against the euro and a basket of major currencies and inflation spirals, maintaining this policy has become problematic, the Abu Dhabi Department of Planning and Economy said in a report.
"This pegging was adopted when oil prices were low and the greenback was at the height of its strength," the department said. "Today, the dollar is falling relentlessly and oil prices are skyrocketing. This new reality calls for a rethink of monetary policies."
The department urged nations within the Gulf Co-operation Council (GCC) to peg to a basket of currencies instead, taking into account the region's big trade exposures to the euro. Kuwait broke ranks with its neighbours in 2007 and severed its dollar link in favour of a basket of currencies partly to fight imported inflation.
"GCC states need to peg against a basket of world currencies, taking into account the latest trading patterns, which tend to be bent toward the euro zone and Asia," the department said. "That the Gulf states continued to have fixed dollar exchange rates even as the dollar continues to decline, causes greater harm to the Gulf countries," it said.
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