UAE dirham nears five-year high

The United Arab Emirates dirham held near a 5-year high on Monday as speculation Saudi Arabia might revalue its currency spilled over into other Gulf Arab oil producers that also peg their currencies to the dollar.

Dirham bids were as strong as 3.6685 per dollar, the strongest since November 2002. The spot rate was 3.6702 at 1140 GMT.

Saudi Arabia's riyal surged to 21-year high against the dollar on Thursday and Friday after the world's largest oil exporter said it would hold back from matching Tuesday's 60 basis point US interest rate cut to 4.75%.

Saudi Arabia, the UAE, Qatar, Oman and Bahrain peg their currencies to the dollar, while Kuwait uses a basket of which the dollar is the largest component.

"There is a lot of uncertainty in the market about whether Saudi Arabia will revalue or not," said Mohamed Dameer, a currency dealer at Abu Dhabi Islamic Bank. "This is spilling over into the dirham."

The Qatar riyal was at 3.6367 on Friday, its strongest since July 2004. The spot rate was at 3.6380 at 1141 GMT.

Bahrain's dinar traded below the eight-month high it struck on Friday, when bids were as low as 0.37650. The spot rate was 0.37699 at 1141 GMT.

"Market participants do not want to hold the dollar in their hands during this time of market uncertainty," Dameer said.

Speculation that Saudi Arabia might ditch its peg fuelled buying of the riyal on Thursday and Friday, pushing the spot rate to 3.7362 on Friday, its strongest since December 1986, according to Reuters data. The kingdom has not changed the value of its peg to the dollar since that year.

The riyal fell back to 3.7390 at 1135 GMT on Monday.

"There was a lot of speculation on the Saudi riyal last week and that took attention away from the dirham," said Shahin Vallee, FX strategist at BNP Paribas in London. "Now, to some extent, we are seeing pressure removed from the riyal and put on the dirham and the Qatari riyal."

The UAE is the most likely among the five Gulf states with a dollar peg to revalue its currency, a Reuters poll of 17 economic analysts showed this month.

Qatar is the second most-likely and Saudi Arabia was the least likely, according to the poll.

"There is a lot more trading activity going on the forwards ... the more the dollar moves lower the more the Gulf countries are under pressure for a revaluation as they have announced they will tackle inflation," Vallee said.

"We have seen hedge funds speculating on revaluation" of the UAE dirham, he added.

The central bank governors of Saudi Arabia and the UAE have repeatedly ruled out revaluation, saying inflation is mostly due to domestic factors such as rents rather than higher import costs.

Inflation in Saudi Arabia hit a 7-year high in August. The consumer price index in the UAE rose 9.3% last year, a 19-year high. The UAE has pegged its currency to the dollar at the same value since 1997.

The six Gulf states from the world's biggest oil-exporting region pegged their currencies to the dollar in 2003 with a view to introducing a single currency by 2010.

Saudi Central Bank Governor Hamad Saud al-Sayyari said this month after a Gulf central bankers gathering that meeting the 2010 target would be "difficult".

The governors agreed to follow separate interest rate policies to tackle inflation, Omani Central Bank Governor Hamood Sangour al-Zadjali told Reuters after the meeting.

Oman, which pumps about 700,000 barrels per day of oil, has no plans to match the US rate cut because that would go against country's economic needs, Zadjali told Reuters on Monday, without being more specific.

Oman's rial, which hit a more than four-year high of 0.38346 on Sept. 6, was at 0.38470 at 1140 GMT.

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