What are the pros and cons of ‘revaluing’ a nation’s currency?
Various countries including many of the Gulf states have their currency pegged to the dollar, so that when the dollar rises or falls their currency follows.
Soaring oil prices and increased exports from Gulf states have boosted demand for their currencies, and this would normally cause their currencies to strengthen. However, the dollar has been falling and so therefore must their currencies. This results in inflationary pressure, as a weak currency means expensive imports.
Theoretically, leaving a dollar peg system would mean that their currencies could be valued at a market rate (ie, one determined by supply and demand). This would therefore result in a stronger currency and reduced inflation. This would be a free-floating exchange rate system, but there are questions as to whether these countries would be capable of independant monetary policy.
An alternative idea, as you mentionned is a ‘bread basket of currencies’. This involves pegging their exchange rate against a variety of currencies perhaps including the Euro, Yen, Dollar etc. This would give these countries more protection against oil-price swings, or a rapid change in the value of the dollar. However, the basket would still tend to be made up of oil exporters, so it is not a perfect fit by any means.
If these countries were to abandon the dollar, others could follow, possibly resulting in a large sell off of dollars, dropping its value further. In the US, this is likely to cause inflationary pressures.
I hope this helps
There are a couple of good Economist articles on this:
http://www.economist.com/finance/displaystory.cfm?story_id=10191717&CFID=529815&CFTOKEN=37bb0560ddafac78-EE64954C-B27C-BB00-01436E602548520D
http://www.economist.com/opinion/displaystory.cfm?story_id=10177927