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Why Gulf's Currency Launch Won't End Dollar Hegemony

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Rest assured, it will end -- but not because of the "Gulfo."

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After years of threats, four of six countries in the Gulf Cooperation Council (GCC) finally agreed to a monetary union with a single currency and central bank.

Saudi Arabia, Kuwait, Bahrain, and Qatar opted in. The UAE and Oman opted out of the agreement.

So what does it mean?

For Ambrose Evans-Pritchard's opinion, please consider Gulf Petro-Powers to Launch Currency in Latest Threat to Dollar Hegemony:

"The Gulf monetary union pact has come into effect," said Kuwait's finance minister, Mustafa al-Shamali, speaking at a Gulf Co-operation Council (GCC) summit in Kuwait.

The move will give the hyper-rich club of oil exporters a petro-currency of their own, greatly increasing their influence in the global exchange and capital markets and potentially displacing the US dollar as the pricing currency for oil contracts.

The Gulf states remain divided over the wisdom of anchoring their economies to the US dollar. The Gulf currency -- dubbed "Gulfo" -- is likely to track a global exchange basket and may ultimately float as a regional reserve currency in its own right. "The US dollar has failed. We need to delink," said Nahed Taher, chief executive of Bahrain's Gulf One Investment Bank.

Khalid Bin Ahmad Al Kalifa, Bahrain's foreign minister, told the FIKR Arab Thought summit in Kuwait that the project would not work unless the Gulf countries first break down basic barriers to trade and capital flows.

At the moment, trucks sit paralyzed at border posts for days awaiting entry clearance. Labor mobility between states is almost zero.

Yet hurdles are formidable even for the tight-knit group of Gulf states. While the eurozone is a club of rough equals -- with Germany, France, Italy, and Spain each holding two votes on the ECB council -- the Gulf currency will be dominated by Saudi Arabia. The risk is that other countries will feel like satellites. Monetary policy will inevitably be set for Riyadh's needs.

Hans Redeker, currency chief at BNP Paraibas, said the Gulf states may have romanticized Europe's achievement and need to move with great care to avoid making the same errors.

"The Greek crisis has exposed the weak foundations on which the euro is built. The gap in competitiveness between core Europe and the periphery has grown wider and wider. The obvious mistake was to launch EMU without a central fiscal authority and political union, as the Bundesbank warned in the 1990s," he said.

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