Gulf Arabs reconsider their currency pegs to dollar


By Will Rasmussen
Thursday, January 11, 2007

ABU DHABI -- Gulf Arab oil producers are reviewing currency pegs to the falling dollar and could decide as early as March whether to keep or change their exchange rate regime, the United Arab Emirates central bank said on Thursday.

Governors of the six Gulf central banks will meet in March in Saudi Arabia and may agree to switch to another currency or currency basket, Governor Sultan Nasser al-Suweidi said. They may decide leave the pegs as they are and any changes would have to be approved by Gulf Arab rulers, he said.

"We might come up with a decision that says we are OK and stick to the same (regime), or we could come to the conclusion that we need to change," Suweidi told Reuters in an interview.

It was the first acknowledgement that the Gulf might not stand by a currency regime designed to prepare for monetary union in 2010, although markets began speculating about a revaluation last year as the dollar fell around 10 percent against the euro.

However, achieving consensus will not be easy in a region that is squabbling over how and when to adopt a single currency. Oman dismissed any suggestion of a Gulf-wide revaluation.

"Oman has no intention of changing its peg, no intention of revaluing its currency," Central Bank Executive President Hamood Sangour al-Zadjali told Reuters by telephone from Muscat.

Suweidi's comments pushed up currencies across the world's top oil exporting region with the UAE dirham hitting a two-week high of 3.6720.

"It removes the assumption most of the market has held, that this (revaluation) couldn't happen before a single currency," said Steve Brice, regional head of research at Standard Chartered.

The six members of the Gulf Cooperation Council (GCC) -- UAE, Saudi Arabia, Kuwait, Qatar, Oman and Bahrain -- are working toward monetary union, although Oman plunged the project into crisis last month, saying it would not join in 2010.

"Changing the peg is a GCC decision. We went into it together. We will go out of it together," Suweidi said.

Suweidi said the governors could opt for more flexible exchange rates, instead of the fixed pegs now maintained by all states except Kuwait, which revalued its currency last year.

They may decide to peg to another currency or basket of currencies, he said, declining to comment on what currencies were being considered.

"Whether it should be fixed or fluctuating is one issue. Another is issue to change the currency of the peg," he said.

The dollar's slide last year is driving up the cost of imports in the region, where some countries, such as Kuwait, pay for half their imports in euros and yen.

"The main factor is (currency) values. You have to adjust sometimes in a fixed peg. Your (currency) could be overpriced or underpriced," said Suweidi, whose country will have highest inflation rate in the Gulf this year, according to a Reuters survey last month.

Kuwait, which allows its dinar to trade in a 3.5 percent band around a reference rate set in 2003, revalued the currency in May for the first time in 17 months, allowing a 1 percent appreciation against the dollar.

The move sparked a currency rally across the Gulf, as investors bet other countries, especially Saudi Arabia, would follow suit.

The Saudis moved to quash market speculation about a revaluation twice last year.

"But before this (Suweidi's) statement becomes credible. ... You will need to have some confirmation from other regional central banks, especially from the Saudis, that they are willing to abandon the dollar peg," Calyon economist Koceila Maames said in London.

Saudi Arabia accounts for about half the GCC's gross domestic product and 58 percent of oil production.

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