By Will Rasmussen
Investors bet on central banks revaluing currencies against dollar.
Gulf Arab currencies rose on Thursday as the dollar held near a record low against the euro, prompting speculation the region's oil exporters may revalue or drop their dollar pegs to contain inflation.
Saudi Arabia's riyal, which has been fixed at 3.75 to the dollar since 1986, hit as strong at 3.74 to the dollar. Investors were betting the UAE dirham would appreciate by 2.8% in one year and 4.1% in two years, according to forward rates.
Kuwait let the dinar appreciate against the dollar for a second time, taking gains since the country dropped its dollar peg in May to more than 6% for the first time.
Inflation is becoming a growing concern across the world's biggest oil-exporting region, where price rises hit a quarter century peak of 7% in Saudi Arabia and 13.74% in Qatar in the fourth quarter, just off a record.
Costs of Gulf imports denominated in euros have risen on average more than 20% this year, said Elyas Al-Gaseer, Middle East head of capital markets at Calyon.
"They have come up with a lot of solutions but it seems that all of them won't stop inflation unless they do something about the currencies," he said.
Oil prices near $100 per barrel would also make it easier for Gulf governments to revalue, adding to speculation they could change policy soon, he said.
Dollar pegs restrict central banks' ability to fight inflation by forcing them to shadow US monetary policy at a time when the Federal Reserve is cutting rates in an attempt to ward off recession.
By contrast, Gulf economies are surging on a near five-fold jump in oil prices since 2002.
Gulf Arab inflation would fall "significantly" were the oil producers to drop their dollar pegs, former Fed chairman Alan Greenspan said on Monday.
Some Gulf policymakers have voiced concerns about the status quo. Qatar is studying revaluing its riyal among options to fight inflation, Qatari Prime Minister Sheikh Hamad bin Jassim bin Jabr Al-Thani told newswire Reuters on Saturday.
The exchange rate contributes to about 40% of inflation in Qatar, where the currency is 30% undervalued, Sheikh Hamad said.
Investors were betting on a 2.9% appreciation of the Qatar riyal in nine months, forward rates showed.
Kuwait's central bank has not revealed the composition of its basket, saying only it is largely weighted in dollars. Inflation in the world's seventh-largest oil exporter hit a fresh record of 7.3% in October, the latest available figure.
"Kuwait's currency basket is under particular pressure as its effectiveness in combating imported inflation is scrutinized as prices continue to rise," said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi affiliate. (Reuters)