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Tue 1 Jan 2008 04:00 AM

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Currency confusion hits GCC states

Revaluation or switch to currency basket both possible.

There was uncertainty over the future of the Gulf currencies after a series of contradictory statements by the region's finance ministers, following the GCC Summit in Doha last month.

Economists and analysts had thought it likely an announcement would be made that the five GCC currencies still pegged to the dollar - the UAE dirham, Bahraini dinar, Omani rial, Qatari riyal and Saudi riyal - would either be revalued or pegged to a basket of currencies to compensate for the declining US dollar.

Some exchange houses in the UAE revalued the dirham by up to 17% during the GCC Summit, wary of losing money if the dirham was revalued. They were later penalised by the UAE Central Bank.

The dollar peg was reportedly not discussed at the summit, but a series of public comments since then by the heads of monetary policy in the five states has fuelled speculation that there could be at least a one-time revaluation of some of the currencies.

A local newspaper reported that Bahrain's Finance Minister Shaikh Ahmad Bin Mohammad Al Khali has told the advisory Shura council that the dinar will move from the dollar peg to a basket of currencies without appreciating.

Other reports have indicated that Qatar and the UAE, which have the highest inflation rates in the Gulf, are most likely to switch to a link with a basket of currencies, while Bahrain, Saudi Arabia and Oman maintain their peg to the dollar with a revaluation.

The US Federal Reserve cut interest rates by 25 basis points last month, a move that was copied by Saudi Arabia, the UAE, Bahrain and Qatar, despite concerns that it could fuel inflation.

Kuwait dropped the dinar's peg to the dollar at the World Economic Forum on May 20 last year, moving to a trade-weighted basket of currencies which is still dominated by the US currency. The dinar has appreciated by 5.5% since then.

Any decision by the other GCC states away from the dollar peg could delay the move to a Gulf single currency, which is still scheduled for 2010, although Oman has said it will not meet this deadline.

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