The dollar’s slippery slope

It was an active few days on the ground where I was in place to chair panels for the annual “Leaders in Dubai Forum”.

The event gathers some big names including Nobel Laureates Kofi Annan and Muhammad Yunus, plus top corporate leaders from inside the region.

While the central theme of the business forum was “Networking for the Present, Ideas for the Future”, the sub-theme was eroding confidence in the U.S. economy and more importantly the fall of the U.S. dollar.

Concerns were shared equally from those representing the East and West. I chaired the CNN CEO Debate and conducted two one-on-one interviews over the two days; one with Forbes Editor-in-Chief Steve Forbes and the other with Sallie Krawcheck, CEO of Citi Global Wealth Management. When I used the analogy that the sub-prime market crisis in America feels similar to being in a lift (or elevator) wobbling between floors, she quickly replied, it is more like an elevator in free fall.

That is not a great confidence builder from someone who manages $1.8 trillion in assets. Her concern is shared by others on Wall Street, where the dollar has hit a record low against the Euro and oil continues to knock on the door of $100 a barrel.

While pessimism reigned about America’s woes, confidence remained buoyant for prospects within the region. The Middle East is growing 7 percent, but that is posing a real problem for loyal followers of the U.S. dollar. Most members of the Gulf Cooperation Council (GCC) have kept their currencies pegged to the U.S. currency. Last May, Kuwait left that relationship and is linked to a basket of currencies like the Euro, British pound and the Japanese yen. It looks like others, namely Saudi Arabia, Qatar and the United Arab Emirates may follow suit. The GCC will gather in Doha in early December to discuss financial matters – i.e. the dollar peg.

Historically, being linked to the dollar was a sure fire way to combat inflation – since their economies were basically in the hands of the U.S. Federal Reserve. But with a weak dollar, fast growth and a flood of money from oil revenues, GCC countries are importing record inflation. It is running at 9 percent in the U.A.E. and 14 percent in Qatar.

But there is yet another sub-theme playing out. Weakness in the dollar is leaving Washington open to criticism about global economic leadership. At the OPEC Heads of State meeting in Riyadh tensions spilled over about using the dollar as the benchmark currency to price oil.

Leading the charge against the dollar were Hugo Chavez of Venezuela and Mahmoud Ahmadinejad of Iran. Chavez boldly stated, “God willing, with the fall of the dollar, the deviant U.S. imperialism will fall as soon as possible, too."

Saudi Arabia, the summit host and the largest producer within OPEC resisted pressure to mention the dollar in the final communiqué. But if it does not find a floor soon, don’t expect long-term political allies to remain loyal followers of the once mighty U.S. currency.

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