The Saudi riyal rose to a fresh 21-year high against the dollar on Tuesday as speculation mounted that the world's largest oil exporter might revalue its dollar-pegged currency.
Saudi neighbour UAE on Tuesday dropped its three-month Certificate of Deposit (CD) interest rate for the second time in a week, cumulatively matching half the 50 basis-point cut in the US federal funds rate on Tuesday.
Saudi Arabia, one of five Gulf Arab states, including the UAE, with a dollar peg, said last week it would not cut rates.
"There has been foreign money coming in because the central bank explicitly said it would not follow the Fed cut," Caroline Grady, an economist at Deustche Bank, said of the riyal's rise. "The speculation is that this will force them to revalue."
Kuwait, which values its currency against a basket of which the dollar is largest component, allowed its dinar on Tuesday to rise for a second time in three days, taking its cumulative gain against the dollar since dropping the peg in May to 3.32%.
Saudi Central Governor Hamad Saud Al-Sayyari told Reuters on Wednesday that "after reviewing the situation of liquidity and the economic situation, we feel there is no need for a change."
Sayyari and Vice Governor Mohamad Al-Jasser have since not been available for comment.
The riyal moved to 3.7300 against the dollar on Tuesday, according to Reuters data, its strongest since December 1986, the year the kingdom pegged its currency to the dollar at 3.74. The spot rate was 3.7340 at 1115 GMT.
Saudi Arabia, the UAE, Bahrain, Oman and Qatar have repeatedly ruled out revaluation, saying inflation in the region at near record highs is mostly due to domestic factors such as rents rather than higher import costs.
Inflation in Saudi Arabia hit a seven-year high in August and the highest in 19 years in the UAE in 2006.
The UAE dirham rose to a five-year high of 3.6682 on Monday, before easing to 3.6700 at 1108 on Tuesday.
"They could be trying to target long-term investors," Monica Malik, Middle East economist at EFG-Hermes in Dubai, said of Tuesday's UAE rate cut. "There is foreign and European institutional interest in buying local currencies, betting on a revaluation." - Reuters
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