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Saudi Arabia may revalue to avoid split with neighbors over dollar

Section: Daily Dispatches

By Souhail Karam and Daliah Merzaban
Tuesday, November 20, 2007

Saudi Arabia may be considering its first revaluation in 21 years to help bridge a divide with oil-producing neighbours worried about pegs to the tumbling dollar, al-Riyadh newspaper reported on Tuesday.

The world's largest oil exporter was still unlikely to change a riyal exchange rate set in 1986, raising the risk that the United Arab Emirates and Qatar would switch to currency baskets, the paper quoted Abdul-Aziz al-Uwaisheg as saying. Uwaisheg, a Saudi national, is head of studies and economic integration at the General Secretariat of the Gulf Cooperation Council, a grouping of six states preparing for monetary union as early as 2010.

Kuwait threw the monetary union plans into disarray in May by switching its dollar peg to a currency basket, and markets are betting other central banks will follow suit, unable to maintain their currency pegs while controlling inflation.

The Qatari riyal hit a five-year high on Tuesday as Gulf currencies extended a rally that started when a source familiar with Saudi policy told Reuters on Friday that Riyadh could consider a revaluation to keep monetary union plans alive.

Growing expectations of a Gulf shift away from the dollar have weighed on the U.S. currency, partly because it could signal diminishing demand for U.S. assets in a region where central banks and sovereign wealth funds hold $1.2 trillion.

"Saudi Arabia might have started a study to change the riyal's exchange rate but it probably does not want to officially announce these studies to avoid creating concern in markets until a final decision is made," Uwaisheg said, according to al-Riyadh.

Uwaisheg confirmed he had talked to the newspaper but said the reporter had misquoted him.

Al-Riyadh's economic editor, Saleh al-Zaid, told Reuters he had a recording of the conversation and was standing by the story. Uwaisheg had not asked for a retraction, he said.

"Gulf states will not stand still if the dollar continues to decline and Saudi Arabia sticks to its policy," Al-Riyadh quoted Uwaisheg as saying.

UAE Central Bank Governor Sultan Nasser al-Suweidi said last week he was under growing social and economic pressure to follow Kuwait's lead, although he would only act in concert with Saudi Arabia and three other states preparing for monetary union.

The UAE, where inflation hit a 19-year high of 9.3 percent last year, plans to raise wages of federal government employees by 70 percent from next year, the state news agency said.

Among Gulf states, the UAE has been hardest hit by the dollar's slide to a record low against the euro, a 26-year trough against sterling and an 18-month low against the yen this month.

Businesses are complaining about rising costs and migrant construction workers rioted in Dubai this month to demand a pay rise to compensate for savings lost due to the dollar's slide.

The UAE economy ministry said exchange-rate reform would be one of the ways of containing inflation driven by the dollar's slide which was making some imports more expensive.

"The UAE government is serious about containing inflation," the ministry said in a report released on Monday.

A third of the country's imports are paid for in euros and sterling, the ministry said. "The prices of imports from these countries has risen in UAE dirhams, leading to imported inflation," the ministry said.

Kuwait, which cited imported inflation as the reason for its decision to drop the dollar peg, let the dinar rise for the first time in a week on Tuesday. The dinar has gained 4.76 percent since the central bank switched to a currency basket on May 20.

Inflation has accelerated across the Gulf as a near fivefold rise in oil prices since 2002 fuels economic growth.

The dollar pegs force Gulf central banks to track U.S. monetary policy to maintain the relative value of their currencies at a time when the Federal Reserve is cutting interest rates.

Fed policy moves in the wake of a U.S. mortgage crisis no longer suit the rapidly expanding economies of the Gulf, Suweidi said on Thursday, making the case for currency reform.

In September inflation accelerated to a 16-year high of 7.09 percent in Oman, and a 10-year high of 4.89 percent in Saudi Arabia, which has held its riyal at 3.75 per dollar since June 1986.

The Saudi riyal surged to a 21-year high on Monday after a source familiar with Saudi policy told Reuters the kingdom could consider a currency revaluation, although it would not drop its dollar peg.

Forwards showed investors betting on a 2.6 percent appreciation in the Saudi riyal and a 3 percent rise in the UAE dirham in a year.

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