Dollar pegging and curreny basket Essay Example | Topics and Well Written Essays - 3500 words

Dollar pegging and curreny basket - Essay ExampleAs the oil producing countries argon getting more capital due to rising oil prices, people puzzle more spending power and the relative commodity prices increase in the domestic economy. Table 1 shows the inflation aims in gulf countries over three different periods 1980-81 (high inflation), 1986-2003 (low but volatileinflation) and 2006-07 ( current inflation situation). As chart 1 and Table 1 show falling dollar contributes to high oil prices that in turn lead to high inflation. On the otherwise hand when the state of dollar is normal the oil prices remain average and hence the result is low inflation (Garriga and Armesto, A Falling Dollar Raises pretension in the Gulf).After de-pegging from dollar, new switch rate was governed by the basket of currencies that helped to stabilize the effect of depreciating dollar on the exchange rate of Kuwaiti Dinar in the world market. Due to this basket of currencies which included a good prop ortion of Euro allowed checking rising import rates due to wear and tear of dollar against Euro. This further helped in controlling inflation which was rising due to increase in imports from European and exports to Asian countries.Since 1980 the Bahraini dinar and the Qatar riyal have been pegged to US dollar at the rate of 0.37 per $ and 3.64 per $, respectively. Likewise, since the 1980s the Saudi riyal (1986) and UAE dirham (1981) are fixed at a rate of 3.75 per $ and 3.67 per $, respectively (Hebous On the Monetary Unionof the Gulf States). The exchange rate of a funds is determined by the purchasing power parity. For eg. If 10 gms of 24 carat gold can be bought with 1 USD and same amount of gold can be purchased with 4 Qatar riyal then 1$ equals to 4 Qatar riyal. This is how the exchange rate of every currency is determined in the world market (Saville How are currency exchange rates determined). The value of a currency is usually determined by the demand for and supply of t hat currency. For