From: Reuters
Published June 1, 2008 01:47 AM

Paulson says dollar peg has served Mideast well

By David Lawder and Souhail Karam

JEDDAH (Reuters) - U.S. Treasury Secretary Henry Paulson said on Saturday the dollar peg for currencies in the Gulf Arab countries had served the region well and any changes to the peg would be a sovereign matter.

Dollar pegs in all Gulf Arab states except Kuwait force their respective central banks to match U.S. interest rate cuts, and has helped fuel inflation as their economies are booming due to record oil prices.

This also reduces their purchasing power for goods denominated in other currencies.

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Asked about his concerns over the dollar peg, Paulson, on a visit to Saudi Arabia, Qatar and the United Arab Emirates, told a news conference:

"That is a sovereign decision ... The dollar peg, I think, has served this country (Saudi Arabia) and this region well. That speaks for itself."

Qatar's top economic policy adviser Ibraham al-Ibrahim was quoted late on Friday as saying that Qatar must de-link its currency from the dollar peg.

But Saudi Finance Minister Ibrahim al-Assaf, who joined Paulson in the news conference after a series of meetings, reaffirmed his commitment to the dollar peg.

"We have no intention of depegging or revaluation," Assaf said. "As Mr. secretary (Paulson) said ... it's a position that has served us well. (The peg to the dollar) has served us well and we look at the long-term interest of Saudi Arabia,"

Turning to the price of oil, which hit a record high of more than $135 a barrel last week, Paulson reiterated his calls for additional investment in oil producing countries, particularly from foreign sources, to help increase production.

"There is no doubt that the current prices are a burden on economies around the world and a burden on people around the world," Paulson said.

Assaf agreed, saying Saudi Arabia was investing billions of dollars to increase both upstream crude oil production and downstream refining capacity to help meet global demand.

"We don't like these extreme volatilities in the (oil) market. They are not good for the consuming countries and they are not good for the producing countries."

(Reporting by David Lawder and Souhail Karam; editing by Christopher Johnson)

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