Tuesday, November 20, 2007

Gulf States Retinking Dollar Peg

From the WSJ:

For many years, oil-rich Persian Gulf states have pegged their currencies to the dollar. Now that link is stoking a bad bout of inflation in their red-hot economies and putting policy makers in a dilemma: Break the dollar peg and risk undermining the U.S. currency, or keep it and face growing local discontent.

The dollar peg has "served the economy...very well in the past," said Sultan Nasser al-Suweidi, the governor of the United Arab Emirates' central bank, last week. "However, we have reached a crossroads."

The weekly dollar chart says sell me:

This is a beat market chart. Prices are making lower lows and lower highs. Prices are also continually breaking previous support levels.

If this happens -- one of these countries breaks their dollar peg -- the chances are better than 50% it would start a run on the dollar (in my opinion). It would cause a short-term dislocation in the market. It would be very, very, bad.