The dollar will fall in value this year, devaluing the dirham and other Gulf currencies pegged to the greenback, according to Paul Krugman, a Nobel prize-winning economist.
International investors who fled to dollar-denominated assets as a safe haven will begin re-investing their funds in other currencies, he said. This shift, although unlikely to hurt the US economy, could bring risks for Gulf economies that peg their currencies to the dollar.
"The credit markets are finally stabilising. There was clearly a rush into US treasury bills in a dangerous world. But take that away, and people aren't going to be quite so willing to hold dollars," Mr Krugman said in an interview in Abu Dhabi yesterday.
"If you are some third party that is pegged to the dollar, you're getting a devaluation. Was that what you had in mind? Was that a policy?"
The dollar fell the most against the euro in two months last Friday as the currency finished the week down against all of the 16 most actively traded currencies tracked by Bloomberg.
Mr Krugman, who gained recognition for predicting problems caused by fixed exchange rates in South East Asia during the 1997 financial crisis, said the UAE and its GCC neighbours should instead consider linking their currencies to a basket which gives more or equal weight to the euro than to the dollar.
"This region is closer to Europe than it is to the US, so why should the dollar be the sole peg?"
De-pegging could give countries more flexibility to tailor their monetary policy to their specific economic needs according to Mr Krugman, who cited the example of Argentina in the 1990s.
"I am very influenced by examples. Argentina, with its convertibility law and the peg to the dollar, got whipsawed by a rising dollar in the late 90s which priced Argentine goods out of competition with Brazilian goods, which was crazy," he said.
The UAE has maintained a fixed exchange rate with the US currency since 1997, although its currency has tracked the dollar since 1978. As recently as last year, a rapid appreciation of the dollar stoked inflation throughout the Gulf, bringing it to dangerously high levels, many economists warned. Although the global economic slowdown has slowed the rate of inflation in the UAE, some economists have still called for the Central Bank to cut the dirham free of the dollar in order to follow a more independent monetary policy.
Among GCC states, only Kuwait has dropped the dollar peg. It moved to a basket of currencies in 2007. Although the exact composition of Kuwait's currency basket is not known, analysts say it consists mostly of dollars.
Mr Krugman said the UAE's decision to unilaterally withdraw from a planned GCC monetary union last week may not be a significant loss even if it threatens to derail the common currency project.
"I wouldn't shed a whole lot of tears over failure to create a currency union in this area," he said.
"I tend to be sceptical about monetary union projects. ? Labour mobility helps, and again [in the GCC] you have very high labour mobility, but even the euro zone is having exactly the problems that a currency union sceptic would expect: one size fits all monetary policy, lack of fiscal integration, and so on."
The decision to withdraw from the monetary union project was caused mainly by the GCC's decision to locate the planned Gulf central bank in Riyadh, rather than Abu Dhabi, government officials have said.
Mr Krugman is speaking today on the outlook for the global economy at the Megatrends conference in Abu Dhabi.
tpantin@thenational.ae
ORDER OF PLAY ON SHOW COURTS
Centre Court - 4pm (UAE)
Gael Monfils (15) v Kyle Edmund
Karolina Pliskova (3) v Magdalena Rybarikova
Dusan Lajovic v Roger Federer (3)
Court 1 - 4pm
Adam Pavlasek v Novak Djokovic (2)
Dominic Thiem (8) v Gilles Simon
Angelique Kerber (1) v Kirsten Flipkens
Court 2 - 2.30pm
Grigor Dimitrov (13) v Marcos Baghdatis
Agnieszka Radwanska (9) v Christina McHale
Milos Raonic (6) v Mikhail Youzhny
Tsvetana Pironkova v Caroline Wozniacki (5)
Dhadak
Director: Shashank Khaitan
Starring: Janhvi Kapoor, Ishaan Khattar, Ashutosh Rana
Stars: 3
Killing of Qassem Suleimani
Killing of Qassem Suleimani
Recipe: Spirulina Coconut Brothie
Ingredients
1 tbsp Spirulina powder
1 banana
1 cup unsweetened coconut milk (full fat preferable)
1 tbsp fresh turmeric or turmeric powder
½ cup fresh spinach leaves
½ cup vegan broth
2 crushed ice cubes (optional)
Method
Blend all the ingredients together on high in a high-speed blender until smooth and creamy.
Mohammed bin Zayed Majlis
In numbers: PKK’s money network in Europe
Germany: PKK collectors typically bring in $18 million in cash a year – amount has trebled since 2010
Revolutionary tax: Investigators say about $2 million a year raised from ‘tax collection’ around Marseille
Extortion: Gunman convicted in 2023 of demanding $10,000 from Kurdish businessman in Stockholm
Drug trade: PKK income claimed by Turkish anti-drugs force in 2024 to be as high as $500 million a year
Denmark: PKK one of two terrorist groups along with Iranian separatists ASMLA to raise “two-digit million amounts”
Contributions: Hundreds of euros expected from typical Kurdish families and thousands from business owners
TV channel: Kurdish Roj TV accounts frozen and went bankrupt after Denmark fined it more than $1 million over PKK links in 2013
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Skewed figures
In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.
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Killing of Qassem Suleimani
The view from The National
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
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Engine: 3-litre twin-turbo V6
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Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
Mountain%20Boy
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Our family matters legal consultant
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
The Africa Institute 101
Housed on the same site as the original Africa Hall, which first hosted an Arab-African Symposium in 1976, the newly renovated building will be home to a think tank and postgraduate studies hub (it will offer master’s and PhD programmes). The centre will focus on both the historical and contemporary links between Africa and the Gulf, and will serve as a meeting place for conferences, symposia, lectures, film screenings, plays, musical performances and more. In fact, today it is hosting a symposium – 5-plus-1: Rethinking Abstraction that will look at the six decades of Frank Bowling’s career, as well as those of his contemporaries that invested social, cultural and personal meaning into abstraction.