Dollar drop puts UAE at 'crossroads' on currency link

By Matthew Brown
Bloomberg News Service
Tuesday, November 13, 2007

http://www.bloomberg.com/apps/news?pid=20601083&sid=aw0Fnv46l3Cg&refer=c...

DUBAI -- The United Arab Emirates may drop the dirham's peg to the dollar after the country's central bank governor indicated that the weakening U.S. currency was forcing him to rethink its currency policy, analysts said.

"We have reached a crossroads now with a further deterioration in the U.S. dollar and expected further weakening of the U.S. economy," Reuters cited Governor Sultan Bin Nasser al-Suwaidi as saying in Tokyo today. The U.A.E. has no plans to drop the peg alone and any decision will be made by the six-nation Gulf Cooperation Council "at the right time," he said.

Inflation across the Persian Gulf has been fueled by record oil prices and a decline in the dollar that has made imports from Europe more expensive. The dollar has fallen against all 16 most-actively traded currencies tracked by Bloomberg in the past three months, dropping 7.2 percent against the euro and 7.4 percent against the yen.

"It's the most significant comment recently that the UAE is looking to move away from the dollar peg," said Monica Malik, a Dubai-based economist at EFG Hermes Holding, Egypt's largest investment bank. "The positives of pegging the dirham to the dollar may be outweighed by the negatives."

Contracts to buy dirhams in 12 months time had their biggest one-day gain since 1999 after al-Suwaidi's comments were reported. The forward contracts were trading at 3.6013 at 4:28 p.m. in Dubai, a 2 percent premium on the peg price of 3.678 dirhams.

Saudi one year forwards rose to 3.7 riyals, a one percent premium over the spot price today, while one year Qatari riyal forwards climbed to 3.6, also 1 percent stronger than the spot price.

Kuwait dropped the dinar's peg to the dollar in May, citing inflationary pressure from the weak dollar. The remaining five Gulf states have all denied that they plan to change their currency policies.

"It's a strong comment and should be read as proof that the issue of the dollar peg is being actively debated," said Simon Williams, an economist at HSBC Holdings Plc in Dubai. "If Mr. Suwaidi is really saying that the UAE will act only when the rest of the Gulf is ready, then the likelihood of adjustment any time soon still looks low."

A decision on whether to revalue "has not been reached," said Marios Maratheftis, a head of research for Standard Chartered in the Middle East. "The very fact there's a debate going on is important. The economic argument is there."

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