Will OPEC Dump the Dollar?

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David Woo, currency analyst at Barclays Capital (BCS) in London, thinks the impact on the dollar will be "a relatively short-term phenomenon," because Gulf Central banks and sovereign wealth funds won't necessarily follow up the currency changes with big dollar sales. They may already have restructured their portfolios, he says.

Currencies at a Crossroads

But Monica Malik, a Dubai analyst with investment bank EFG-Hermes, says the initial break from the dollar could lead to expectations of more adjustments if the dollar continues to be weak, as many analysts expect. "If the dollar continues to weaken, speculation will increase," she says.

The most likely country to move, analysts figure, is the United Arab Emirates, whose central bank governor Sultan Nasser al-Suwaidi said on Nov. 13 that the dollar's slide had pushed the country to a "crossroads." Mushtaq Khan, an economist at Citigroup (C) in London, thinks the U.A.E. and possibly other Gulf countries such as Qatar may announce a decoupling from the dollar at the next meeting of the Gulf Cooperation Council in the first week of December. "I think they are increasingly under pressure to do something," he says. "It will send a signal of intent." Much depends on the performance of the dollar over the next couple of weeks.

Of course, there would be some benefits to shifting away from the dollar or increasing the value of local currencies in places such as Saudi Arabia and the U.A.E. For one thing, there's a certain economic logic, since these oil producers are running up huge current account surpluses. Kuwait's and Saudi Arabia's surpluses, for instance, were 43.1% and 27.4% of gross domestic product in 2006, respectively—a trend usually accompanied by rising exchange rates. The total surplus of the Gulf Cooperation Council countries in 2006 was almost $200 billion.

Taking the Sting Out of Inflation

Moving away from the dollar also would give more firepower to the average citizen. It might help ease labor unrest, which has become a growing problem on the vast building sites of the U.A.E. The mostly Asian work force is incensed over the erosion of the value of the dollar-pegged dirham, now trading at 3.67 to the buck.

And raising the value of the local currencies would take some of the sting out of imported inflation, which has become a political issue in countries such as Qatar and the U.A.E., where inflation is 11.8% and 9.3%, respectively. But rents, a big component of these politically sensitive price rises, are likely to continue to soar as long as housing supplies are tight and tens of thousands of expatriates flood into the countries each year.

Driven to Action

The Gulf countries must be careful they don't wind up slashing the value of the dollar component of their own financial reserves, which Mushtaq estimates at a total of around $1.5 trillion. That's one reason top officials of Saudi Arabia, the most important oil exporter, continue to insist they will stick to pegging their riyal to about 3.70 to the dollar. But analysts figure if there looks to be no end to the dollar's plummet in sight, even the conservative Saudis will find it hard not to act.

"Everybody is talking about it," says Roger Diwan, an analyst at consultancy PFC Energy in Washington. "These guys think strategically, not in terms of quarterly returns. But if they don't see a floor, they will have to do something."

Reed is London bureau chief for BusinessWeek .