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Wed 27 Feb 2008 05:08 PM

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Bets on revaluation grow on Greenspan remarks

Forwards show investors betting on 3% appreciation in UAE dirham in a year.

UAE dirham forwards widened on Wednesday after former US Federal Reserve chairman Alan Greenspan commented in favour of currency reform, renewing bets on Gulf Arab currency revaluations.

Forwards showed investors betting on a 3% appreciation in the dirham in a year and 4.6% in two years at 1120 GMT.

Speaking at conferences in Saudi Arabia and the UAE on Monday, Greenspan said near-record Gulf Arab inflation would fall "significantly" were the oil producers to drop their dollar pegs and float their currencies freely.

"When Alan Greenspan talks, people listen to him," said Jason Goff, head of group treasury and market sales at Emirates Bank International.

"A good part of speculation on Gulf currencies is outside of the Gulf. What Greenspan says carries weight in the market," he said.

Dollar pegs restrict the Gulf's ability to fight inflation by forcing them to shadow US monetary policy at a time when the Fed is cutting rates to ward off recession. The dollar slumped to a record low against the euro on Wednesday.

Gulf economies, on the other hand, are surging on a near five-fold rise in oil prices since 2002.

The Qatari riyal is about 30% undervalued as a result of dollar weakness, the Gulf state's prime minister told newswire Reuters on Saturday.

Exchange rate weakness was contributing to about 40% inflation that hit 13.74% in the fourth quarter, just off a record, Sheikh Hamad bin Jassim bin Jabr Al-Thani said.

Qatar is studying revaluing its riyal among options to combat inflation, Sheikh Hamad said.

Qatari riyal forwards showed investors expecting a 2.6% appreciation in nine months while bets on the Saudi riyal were for a gain of 1.9% in a year at 1125 GMT.

Both Qatar and the UAE would likely sever their links to the US dollar this year and track currency baskets as Kuwait did last May, Deutsche Bank said last month. (Reuters)

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