No revaluation, depegging before year-end

Gulf central banks are unlikely to revalue their currencies or depeg from the dollar before the end of the year, despite record inflation and the weakening US currency, Mashreq Capital's CEO has told ArabianBusiness.com.

“Maintaining a peg is becoming more and more challenging in a situation of negative real interest rates,” Abdul Kadir Hussain said in an interview on Wednesday.

“[There will] continue to be talk about the peg... that won’t go away anytime soon, but I still don’t see any move, at least this year."

All Gulf states, bar Kuwait, peg their currencies to the dollar. The peg leaves Gulf central banks obliged to mirror the monetary policy of the US Federal Reserve to maintain the relative attractiveness of their currencies.

The Fed has slashed rates three percentage points since September.

The US is cutting rates to ward off recession at a time when Gulf states should be raising rates to cool their booming economies and reduce record inflation.

Inflation hit a 19-year high of 9.3% in the UAE in 2006 and is sitting at a 27-year peak of 8.3% in Saudi. In Qatar, the world's largest exporter of liquefied natural gas, inflation was 13.7% in the fourth quarter.

Gulf states agreed on Sunday resisted pressure to revalue currencies or drop their dollar pegs unilaterally following a meeting of central bank governors in Doha.

Central bank governors also agreed on fresh impetus for efforts to create a single currency by 2010.

Soaring inflation is threatening to derail plans for a GCC monetary union and single currency as central banks come under increasing pressure to sever their ties to the dollar.

Kuwait dropped its dollar peg in May last year citing the rising cost of imports as pushing up inflation and other Gulf states have hinted over the last six months that they may follow suit.

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