Gulf currencies weaken as Saudi backs peg

Dollar-pegged Gulf currencies weakened on Monday after Saudi Arabia signalled it would resist a UAE push for regional exchange-rate reform at a summit of Gulf Arab rulers.

Rulers of the six oil producers meet in the Qatari capital Doha on Monday and Tuesday, with their finance ministers saying currency reform would not be on the agenda.

UAE Central Bank governor Sultan Nasser Al-Suweidi had raised expectations the summit could signal a shift in foreign exchange policy when he called last month for Gulf states to sever pegs to the tumbling dollar and track a currency basket.

Bids on the Saudi riyal slipped off 21-year highs to as low as 3.7182 per dollar after finance minister Ibrahim Al-Assaf ruled out dropping his country's peg to the dollar.

"We will not drop it. That's it," Assaf told reporters in Doha where he and other finance ministers prepared the agenda for the rulers' talks.

The riyal hit 3.6800 on November 28, its strongest since 1986 when the central bank fixed the currency's peg at 3.75 per dollar.

Bids on the UAE dirham also eased to as low as 3.6715 per dollar. The currency, which the central bank has kept stable at 3.6725 against the dollar since 1997, hit a 17-year high of 3.6561 per dollar on Friday.

Saudi Arabia, the largest Arab economy with the Gulf's largest population, ran budget deficits in the 1990s and fears a revaluation would cut the riyal value of dollar-denominated oil revenue.

Its smaller, wealthier neighbours are more concerned the tumbling dollar is stirring trouble among expatriates, who dominate their workforce, and hampering their central banks in the fight against inflation, at decade highs across the Gulf.

After migrant construction workers rioted in Dubai over savings lost to the dollar's slide, Al-Suweidi said the UAE, the second largest Arab economy, was under mounting social and economic pressure to drop its peg and track a currency basket.

UAE policymakers, from the finance minister to the head of the federal advisory body then backed his call for currency reform, saying they would only act in concert with neighbours preparing for monetary union as early as 2010. (Reuters)