5 December, 2007: London, UK -- For weeks, the U.S. dollar's slide has been making headlines: The Economist's cover story was certainly attention grabbing: “The Panic About the Dollar” with George Washington going down in flames (even if its content was more measured); the Financial Times asked“How Low Can the Dollar Go?”; and theeditors over at the Economic Times of India wondered if anyone could slow the slide.

The depreciation of the greenback has been dramatic with myriad knock-on effects throughout the international economy. It has made matters worse for Senegalese farmers, increased the threat of inflation in Asia, undermining the outsourcing industry there--India's rupee has risen 11% against the dollar in 2007--and fuelled speculation of an impending recession. European companies are looking for ways to mitigate rising costs that are rooted in the dollar's fall. There is also concern in the U.S. that American companies could become attractive for takeovers, which could become problematic if strategically important firms become targets (remember the Dubai Ports brouhaha?)

But the area that has been talked about the most is the effect of the currency's fall on oil markets and producers. Oil is listed in dollars, which has dramatically driven up the costs, which at one point were flirting with the $100-mark. In some ways, the currency fluctuations have been a boon to oil producers: according to some reports, if $90 a barrel is maintained then producers will increase their current account surpluses by $200-$300 billion a year. As everywhere though, uncertainty has crept into the equation, as high oil prices could result in a recession and correspondingly lower demand.

These countries also have massive dollar holdings. The six-member Gulf Cooperation Council (GCC)--Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)--hold over $1 trillion in reserves. The group, which is planning for a GCC single currency by 2010, held its two-day annual meeting in Qatar earlier this week and much of the talk revolved around their peg to the greenback. One member, Kuwait, de-pegged from the dollar earlier this year, and the UAE authorities have indicated they would like to as well, but will follow the decision of Saudi Arabia. The problem for leaders, particularly in Riyadh: any de-pegging would cause the dollar to drop, thereby devaluing their holdings, which they would obviously loath to do.

At the end of the GCC gathering, leaders “dodged the thorny issue,” leaving it for another time--though they did commit to the monetary union. They were quoy about dollar negotiations with Qatar Prime Minister Sheikh Hamad bin Jassim Bin Jabr al-Thani saying: "If they discussed [the dollar peg] we will not tell you (reports).”

Some are not overly concerned even if the bloc countries were to de-peg though. According to John Authers:

"When Kuwait 'de-pegged' from the dollar, it 're-pegged' to a basket of currencies, and since then its appreciation against the dollar has been steady. This is what various Gulf finance ministers have hinted they want to adopt… If the GCC de-pegs, it would be bad for the dollar, but not a disaster."

But this example only takes into account one country's de-peg. If a swath of key U.S. allies decided to make the same move wouldn't the outcome be exacerbated. At what point would China start feeling uneasy sitting on $1.4 trillion of depreciating reserves? What about Japan with $1 trillion in reserves? Any adjustment in policy in these countries would be a serious problem for the U.S. economy, which is already suffering from high oil prices and the credit crisis.

What do you think, readers? Email us your responses at editors@diplomaticourier.org