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I was not happy about the way in which I ended my previous post, as I could have continued going around in circles, as many professional commentators have been doing, speculating about the causes of inflation and measures to deal with it, without arriving at a satisfactory conclusion. I just stopped.

So it was no surprise that someone took me up on the illogicality of my closing deductions.

Leo Americanus (American Lion in translation, and at least he admits to being American) demurred at my quote from the Gulf News article, "If any country is found to be a currency manipulator, it is required to hold talks with the US government." Both the article, and LA in his related blog posting, pointed out that China was the last country to be accused of currency manipulation in 1994.

Implying that the Gulf countries are 'manipulating' the dollar is therefore totally erroneous in that kind of context. But I'm more interested in the subtleties of perception.

In that same article from Gulf News, a spokesman for Merrill Lynch was quoted:

"We believe that if the US were comfortable with the idea of GCC currency appreciation, it would ultimately make it much easier for the GCC authorities to break the dollar peg from a diplomatic standpoint."

thus conceding that there is a political element to the currency linkage between the Gulf countries, including Oman, and the USA.

Lo and behold, Henry Paulson, the US Treasury Secretary, was in Qatar, Saudi Arabia and UAE a week later following publication of the US Treasury's recent report to Congress on International Economic and Exchange Rate Policies (FX manipulation report), declaring that

"There is quite an awareness that the dollar peg does not influence inflation [in the Gulf countries] to a significant degree."

Nevertheless, he was also reported to have said that,

any move to de-link the greenback from the currencies 'is their sovereign decision', referring to the five nations of the Gulf Cooperation Council that peg their currency to the dollar,

thereby fueling speculation that the US might consider sanctioning depegging.

The investment management executive vice-president of Morgan Stanley Saudi Arabia wrote on 7th June that

"Although adjusting the peg would not address the underlying causes of inflation (which are primarily domestic in nature), it would have significant adverse impacts, and is probably the most effective way of reducing inflation in the short term."

According to Hamood Sangour Al Zadjali, Governor of the Central Bank of Oman (CBO), Oman has "No plans to remove the rial peg to the dollar since the dollar peg is best suited for our economy." The Sultanate is anticipating 12 percent growth this year, thanks to higher oil prices. The increase in money supply is driving growth in infrastructure and real estate construction as well as in oil exploration services and equipment. It's also driving up rents, coupled with increased demand for accommodation, and adding to land and property speculation.

Oman has opted out of Gulf currency union, inasmuch as the official position is that the dollar peg to the Omani Rial "has helped [the country] attract foreign investments."

UAE Central Bank Governor Sultan Nasser Al Suwaidi admitted that

"High inflation rates were never a concern before, and, although it is a temporary phenomenon, yet now it is indeed the factor behind the differences in opinion at this stage, and it can defer the issuance of the single currency beyond 2010."

The dollar peg was not the only subject under discussion with Mr Paulson apparently. Talks were also said to cover "investments in the United States and the impact of high oil prices."

I trust Paulson was not ridiculed in quite the same way as Britain's Gordon Brown was in Arab News following his meeting with OPEC producers in Saudi Arabia. Brown asked OPEC to "invest in his plans to make Britain less oil-dependent [ ] pouring their profits into Britain’s new wind, solar and nuclear power stations." Dubai and Qatar allegedly showed merely polite interest in the proposal.

Paulson was indeed reported to have asked the GCC countries to "invest in a fund to promote clean energy technology that would be run by the World Bank."

The other issue was investment. A figure in an article from Resource Investor shows that the GCC countries have a collective investment in the USA of around $300 billion, divided fairly equally between equity and debt. The group ranks 11th out of 11 investing countries shown. China, which comes second in the rankings, owns around $900 billion of US debt and just $20 billion in equity.

What better way of showing commitment to the US dollar than by buying a bigger chunk of Uncle Sam? Providing, of course, that it stops short at economic investment, rather than economic investment which could be leveraged as a political tool. Cast your mind back to the controversy caused when Dubai Ports World bid to take over six US ports.

I'd suggest reading a recent article entitled 'Speculative Oil', published by Oxford Business Group on 23rd June on the various factors contributing to the rising price of oil, including the actions of financial speculators and hedge funds.