Why Gulf Dollar Pegs Survive Through Wars, Oil Shocks

Gulf Arab nations have pegged their currencies to the dollar for decades. There’s a reason for that: they reduce foreign-exchange risk for states in the region because so much of their revenue comes from oil, which is priced internationally in the U.S. currency. Periodically the mechanisms are tested, as they were in 2020 when a price war sent crude plummeting below $20 a barrel. With oil back around $100 in 2022, they appear to be in good shape, despite questions about the dollar’s role in the global economy.

The six members of the Gulf Cooperation Council -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates -- have been running currency pegs or managed foreign-exchange regimes since the 1970s and 1980s. Kuwait’s dinar tracks the value of a basket of currencies believed to be dominated by the dollar, while others are linked solely to the greenback. The pegs have helped to shield the region’s economies from the volatility of energy markets and allowed central banks to accumulate reserves in the good times. Those reserves, along with foreign assets held by the region’s sovereign wealth funds, are used in turn to defend the pegs.