We think that the much-reported risks to the value of the foreign assets held by the Gulf Cooperation Council (GCC) countries from the US economic troubles are overstated. Admittedly, the hydrocarbon-rich Gulf economies are heavily exposed to the US economy through investment and their currency pegs to the dollar. So the main risks are a fall in the value of US debt or a collapse in the dollar. However, since liquidity and capital protection is a key aspect of the GCC’s reserves policy, there is still no alternative to US Treasuries. Moreover, although the dollar’s exchange rate is often blamed for inflation in the GCC, supply-side constraints are as important.
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