July revaluation likely for UAE

DOLLAR-PEGGED DIRHAM: UAE could allow currency to rise between 3 and 5%, says EFG-Hermes.

EFG-Hermes said the UAE was 60% likely to revalue its dollar-pegged dirham unilaterally or in conjunction with other Gulf oil producers in the first half of next year.

The UAE could allow its dirham to rise between 3% and 5% "if GCC countries decide to continue coordinating their policies," the Egyptian investment bank said in an annual country research report.

"A lack of consensus ... could lead the UAE to move independently to a currency basket," EFG said.

Gulf Arab oil producers are considering allowing their currencies to appreciate after agreeing to keep pegs to the dollar, UAE Central Bank Governor Sultan Nasser Al-Suweidi was quoted as saying in London-based Al-Hayat on December 15.

Suweidi had triggered a spell of intense market speculation about the imminent demise of the Gulf's fixed exchange rates, after he said last month he was under mounting social and economic pressure to sever the dirham's dollar peg.

He backtracked on those remarks after Gulf rulers agreed at a summit in Qatar to retain dollar pegs and keep any talks on currency reform secret.

If the US currency were to weaken further and the US Federal Reserve to continue to cut interest rates, the UAE would be more likely to act alone in currency reform, EFG said.

Dollar pegs force the UAE and four of its neighbors, including Saudi Arabia, to track US monetary policy at a time when the Fed is cutting rates to contain the fallout of a mortgage crisis.

Inflation in the Gulf, the world's biggest oil-exporting region, is hitting decade highs, including a 19-year high of 9.3% in the UAE last year.

Price rises would accelerate to a new 19-year high of 10.1% this year, a Reuters poll showed this month.

Last week, the US currency climbed to six-week peaks against the yen and two-month highs versus the euro and a basket of currencies. (Reuters)

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