Gulf states’ dollar peg comes under threat

Peter Garnham
Financial Times
Friday November 16, 2007

Speculation heightened on Thursday that Gulf Arab states were preparing to ditch their currencies’ pegs against the dollar as the United Arab Emirates expressed concerns over the policy for the second time this week.

Sultan Nasser al-Suwaidi, governor of the UAE central bank, said on Tuesday that the dollar’s slide had pushed the country to a “crossroads” over the UAE dirham’s peg.

On Thursday, Mr al-Suwaidi followed up those comments, saying there were strong social and economic pressures to drop the dollar peg, suggesting the UAE could move to track a basket of currencies instead, which would predominantly, but not entirely, consist of dollars.

The statement sent the dirham, which has been fixed at Dh3.6725 against the dollar since 1997, sharply higher in the forward currency market, with one-year forward rates predicting a 2.7 per cent appreciation in the currency.

Kuwait switched from a dollar peg to a currency basket in May, but other members of the Gulf Co-operation Council – Saudi Arabia, the UAE, Oman, Bahrain and Qatar – have held steadfastly to their dollar pegs, in spite of the US currency slumping to record lows.

The UAE said it would only drop its dollar peg in concert with other GCC members. Saudi Arabia, the GCC’s most influential member, has so far showed strong determination to fight speculation that it would revalue the Saudi riyal, intervening aggressively last week in the forward foreign exchange market to defend the riyal’s peg.

Full article here.