Qatari riyal drops off seven week high

The Qatari riyal fell on Sunday after hitting its highest in more than seven weeks on Friday when a report cited the country's prime minister as saying a change in the currency regime was "under discussion".

The riyal, which is pegged to the US dollar, rose to 3.6325 on Friday after Bloomberg News reported Sheikh Hamad bin Jasim Al-Thani said the Gulf Arab state "might" revalue its currency, which is 30% undervalued against the weak US dollar.

The riyal dropped to 3.6385 per dollar in early trading on Sunday.

Gulf Arab oil producers would consider revaluing their dollar-pegged currencies together at some stage to tackle rising inflation, Qatar's finance minister told newswire Reuters last week.

The prime minister's comments indicated that Qatar, which is contending with the region's highest inflation, could act alone in reforming currency policy, said Jason Goff, head of treasury sales at Emirates Bank International.

"Investors returned to the revaluation, depegging story with renewed hope," Goff said.

Both Qatar and the UAE would likely sever their links to the US dollar this year and track currency basket as Kuwait did last May, Deutsche Bank said last week.

The UAE dirham fell to 3.6723 per US dollar on Sunday, having hit a near eight-week high on Friday of 3.6663.

Forward prices showed investors betting on appreciation of 2.4% and 1.5% in the UAE dirham and Qatar riyal, respectively, in a year.

The dollar pegs force Gulf oil producers to track monetary policy at a time when the Federal Reserve is cutting interest rates to contain the fallout of a mortgage crisis.

As the Fed slashed borrowing costs by 175 basis points since September 18, Gulf states have followed by cutting some key rates, and ignoring rising inflation at home. Inflation in Qatar was 13.73% in September, just short of a record.

"Further Fed cuts will definitely increase the urgency to solve the incongruent peg policy versus domestic and external generated inflation problems," Goff said. (Reuters)

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