The currencies of Gulf Arab oil-exporting countries have not benefited from the revenue windfall from this year's spike in the price of crude as they are pegged to the dollar and have suffered from its weakness.
Analysts say soaring oil prices and broad weakness in the dollar could also stoke inflation in Gulf countries and dampen consumer spending, potentially undermining their economies.
That augurs poorly for the likes of Saudi Arabia, Bahrain, the United Arab Emirates, Kuwait, Oman and Qatar, whose units have been pegged to the dollar since the mid-1980s since oil is priced in dollars.
Saudi Arabia, the world's largest oil exporter, has fixed the riyal at around 3.75 to the dollar, Bahrain's dinner is pegged at 0.38, UAE's Durham at 3.67, Kuwait's dinner at 0.30, Oman's riyal at 0.39, and Quattro's riyal at 3.64.
These units have been struggling against major currencies like the euro, Swiss franc, sterling and yen, despite oil prices hitting record highs this week. US oil futures fell from a peak of around $55.67 per barrel on Monday to trade under $51 on Friday, but still up nearly 60 percent since the start of 2004.
Gulf currencies have fallen in recent sessions, dragged down by their link to the dollar.
"These currencies weakened because of their peg to the dollar. They go hand in hand," said Ashram Laid, chief currency analyst at MG Financial in New York. Analysts say the most obvious impact of a weaker dollar on Gulf economies has been a rise in the price of imported goods.
"The weakness of the dollar means weakness of the Gulf (currencies) against the euro and Asia," said Koceila Mammas, Middle East and Africa economist at CALYON in Paris.
"That means higher inflation as well," he added, as the increase in prices raises costs for importers while reducing the spending power of consumers in those countries.
The Gulf imports about 45 percent of its goods from Asia, and about 30 percent from Europe, while the United States accounts for just 10 to 15 percent of overseas Gulf purchases.
Global competitive pressures, the open nature of the region's economies and the relative ease with which local companies can switch to lower-cost suppliers could prevent runaway inflation, analysts say, but consumers will need to prepare for higher prices if the dollar falls further.
Dollar weakness, once again the dominant trend in currency markets, is expected to persist until the US trade deficit is brought down to more sustainable levels. The dollar could strengthen temporarily in the near term as it did in the summer but over the medium term the downtrend is clear, foreign exchange analysts say.
Some have started to surmise that Gulf countries might unpaged their currencies due to the dollar's weakness but most agree this would not happen any time soon. Analysts say the dollar peg has provided much of the macroeconomic and currency stability in the region and is unlikely to be lightly abandoned.
"As long as oil is denominated in dollars, I don't think it is in the Gulf's interest to remove the peg. It would just add to currency volatility," said Thibault Invalid, Middle East analyst at Society General in Paris.-Reuters