UAE dirham at one-year low vs US dollar as oil price slumps

Speculation grows that slumping oil prices could lead Gulf states to ditch currency pegs to the dollar
UAE dirham at one-year low vs US dollar as oil price slumps
By Reuters
Thu 27 Nov 2014 03:18 PM

The UAE dirham fell to its lowest against the US dollar in more than a year in the one-year forwards market on Thursday, as speculation grew that slumping oil prices would lead Gulf states to ditch their currency pegs to the dollar.

One-year dollar/dirham forwards rose 8 points, pricing the dirham around 3.673/3.674 in a year's time and implying depreciation from the 3.67 spot rate.

The dirham is pegged to the dollar at 3.6725 and is trading in the spot market at 3.6730.

"There are people raising the issue of the peg as pressure is building up because of lower oil prices and higher dollar," said Sebastien Barbe, head of emerging markets strategy at Credit Agricole.

Growing strength or weakness in the dollar and shifts in oil prices tend to revive questions about the Gulf's currency pegs. Kuwait is the only Gulf oil exporter to track a currency basket, after scrapping its dollar peg in 2007.

Countries from Saudi Arabia to Oman are taking a double hit from oil prices below $80 a barrel and a strong dollar. But the pegs prevent them from devaluing their currencies.

Brent crude oil futures have tumbled almost 35 percent since the end of June, reaching their lowest in over four years.

Analysts at ING said that the focus could now shift to the Saudi riyal, which is also pegged to the dollar. Last month, one-year riyal forwards fell to the lowest since March 2011.

Dollar-riyal forwards were up 50 points on Thursday but still well off October highs. However, the riyal's spot rate has declined to 3.7523 per dollar, compared with its 3.75 peg.

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