That buckling sound you’ve been hearing is not just the nauseating grind of our death-giving credit crunch, but also the dollar peg that’s straining against the overheating economies of the Middle East – which are, no doubt, beginning to wonder why they ever linked their currencies to the weak greenback. As we hardly need to point out, all these gyrations could have a huge impact on cross-border M&A. That said, the smart money is already predicting the outcome of this battle.

Hedge funds and other investors made bundles of money in the 1990s betting currency pegs around the world would break. They are at it again, only this time they are gambling currencies will soar, not plummet.

Among the prime targets are Persian Gulf nations that link their currencies to the U.S. dollar. An economic boom has touched off rampant inflation in these countries. That is putting pressure on policy makers to allow their currencies to strengthen, something they have said they have no plans to do.

But some investors are so keen on these economies that they think the currencies have nowhere to go but up. Everest Capital Ltd., a $3 billion hedge fund based in Bermuda and specializing in emerging markets, wrote in a first-quarter note to investors that it was betting that Saudi Arabia, Qatar and the United Arab Emirates would loosen the hold on their currencies, allowing them to strengthen.

Trades like that represent a remarkable shift from the 1990s. Then, places like Mexico, Thailand and Russia linked their currencies to the dollar as a way to provide financial stability. As their economies floundered, investors pushed governments to break the pegs, which caused their currencies to tank and sparked broader financial crises.

Now the situation is reversed. Everest was founded in 1990 by Swiss-born Marko Dimitrijevic, who steered his firm through a near-death experience during Russia's 1998 default and currency crisis. His Everest Capital Global fund has posted an average annual gain of 26% over the past three years, despite being down in the first quarter of this year.

Everest wrote investors that as inflation mounted in the Gulf, fixed exchange rates "would be put under significant pressure." One bet already paid off. Last year, it made a wager on the Kuwaiti dinar, which became the first currency in the region to abandon a strict peg to the dollar.

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