The repegging question

[Reymar]

With the US dollar facing a grim future, will Gulf nations repeg their currencies, currently tied to the sinking greenback?

http://www.ameinfo.com/89451.html

[RogerL]

With the US dollar facing a grim future, will Gulf nations repeg their currencies, currently tied to the sinking greenback?

http://www.ameinfo.com/89451.html
My bet is probably no. The main reason why I think there is little movement into the Euro is that the Euro is vastly overvalued. Would you be interested in a currency where the underlying economies are averaging less than 1% annual growth and 10% unemployment? Or would you prefer to back an economy with 3-5% annual growth and sub-5% unemployment with little inflation? If the European Central Bank continues its tight money policies, countries being strangled will drop the Euro. Noises in that direction have already been made by Italy, France, and even Germany.

The dollar has been on a slide mostly because of the high budget deficits and the overvaluation of the Chinese yuan. The budget deficits are coming down much faster than expected with annual surprises in revenue of $30-50 billion per year. At the current trend, assuming growth continues and the Fed doesn't strangle the economy, the budget deficit will drop to less than $100 billion in just two to three years as tax cuts work their magic. As a percentage of GDP, a $100 billion deficit is negligible in a $12 trillion economy.

We'll see what happens with the yuan. It's much more likely politics will the deciding influence on what happens here. The threat of China abandoning a dollar peg in combination with a high yuan places downward pressure on the US dollar. If China repegs to a more supportable level, you'll probably see a lot of the downward pressure disappearing.