Gulf to drop peg, UAE will move first - poll

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Saudi Arabia and four other Gulf oil producers are likely drop their pegs to the tumbling dollar, with the UAE expected to move first, possibly in the next month, a Reuters poll showed on Thursday.

Although they are under similar pressure to switch from fixed pegs to a currency basket as Kuwait did in May, the five states are likely to move separately, diminishing chances of meeting a 2010 monetary union deadline, the poll showed.

The poll of 24 analysts across the Gulf and Europe showed a majority seeing the UAE as the most likely candidate for a shift in the currency policy followed by Qatar.

The two countries have the region's highest inflation rates and have been most vocal after Kuwait about the impact on their economies of the dollar's slide to record lows on global markets.

The results of the poll will only fuel speculation that the UAE is on the verge of revaluing the dirham against the dollar.

National Bank of Abu Dhabi (NBAD) said on Thursday it expects the UAE, in which it is the largest asset manager, to allow its currency to appreciate soon.

Government-controlled NBAD said the dirham is undervalued against the dollar by between 10% and 15%.

ArabianBusiness.com reported on Wednesday that a source close to the central bank claimed the dirham could be revalued as early as Sunday.

The source said that a 3-5% revaluation of the dirham to the dollar could be announced on the forthcoming National Day holiday, or the later Eid holiday in December.

The Reuters survey showed for the first time that most analysts believe Saudi Arabia, tipped as least likely to change currency policy in two previous polls, would also drop its peg.

"The Gulf countries are going through a new era, which requires a new FX regime," said Koceila Maames at Calyon, arguing dollar pegs have proved increasingly difficult to maintain.

UAE Central Bank Governor Sultan Nasser Al-Suweidi called this month for regional currency reform, complaining that the pegs forced Gulf central banks to track US monetary policy when their economies were out of step with the US.

The UAE's dirham currency surged to a 17-year high and the Saudi Arabian riyal to a 21-year peak on Wednesday as investors bet that central banks would be unable to maintain their pegs to the dollar and fight inflation at the same time.

The Federal Reserve has cut borrowing costs by 75 basis points since September 18 to contain the fallout from a mortgage crisis, forcing Gulf central banks to follow to prevent currency appreciation and ignore inflation running at decade highs.

Al-Suweidi said he would only move to a currency basket with Saudi Arabia and other members of the GCC, but the analysts in the poll said a co-ordinated policy shift is unlikely.

"The GCC wants to show unity, but the speculative pressures are different, which could be the tipping point that could force some members to act," said Mushtaq Khan at Citigroup.

"If the dollar continues to weaken, the GCC will de-peg. This point is critical," said Khan.

Of the 21 analysts who said the UAE would drop its peg to the dollar, 16 predicted a move before July and seven said it would happen in the next month.

Nineteen of 22 analysts expect Qatar to ditch the dollar peg, with 11 saying it will happen by the end of June, the poll showed.

Fourteen of 22 analysts said Saudi Arabia would drop the peg, with eight saying it would happen by mid-2008.

A source familiar with Saudi currency policy said this month Riyadh could be willing to consider its first revaluation since 1986 to keep plans for monetary union alive, although it would not drop the peg.

Saudi Arabia, Bahrain and the UAE cut interest rates in the past week to try to relieve pressure on their currencies.

"The move by the UAE and Saudi Arabia to cut interest rates smacks of last-ditch desperation," said Gabriel Stein at Lombard Street Research in London.

Indeed, inflation in Gulf countries is running at decade highs, leading to calls for a wage hike in Saudi Arabia, rent caps in other states and riots by migrant workers in the UAE demanding better pay.

Only a tight majority of analysts said Bahrain and Oman would allow their currencies to appreciate against the dollar, with any move more likely in 2008 or 2009 or later.

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