October 23, 2009
China and the GCC are in the Same Boat When it Comes to the Peg
There is a parallel between the Chinese renminbi and the GCC currencies. China allowed its renminbi to gradually appreciate against the dollar during the period 2005-2008.
The renminbi did appreciate during that period. But in August 2008 China decided to re-peg its currency to the dollar. This means that the renminbi has depreciated against the euro, the yen, the Swiss Frank and many other currencies. However, it has appreciated against the Vietnamese Dong, the Nigerian naira and the Iranian rial.
The Chinese did discussed seriously the possibility of tying its currency to a basket of currency and let it appreciate with it. But nothing happened.
The same story applies to the GCC currencies (the KD is the exception).
The GCC currencies did not appreciate relative to the dollar and major currencies as the renminbi they did appreciate relative to the Argentinean peso, the Vietnamese Dong and the Costa Rican colon.
This makes us wonder why all these prosperous countries love to tie their currencies to the dollar!! I guess I can find more than one reason that explains that.
But I could also find many reasons that work against the peg. Imported inflation from the Euro Zone and Japan to the GCC is one of them.
