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Mon 21 May 2007 01:27 PM

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UAE in spotlight after Kuwait currency shift

Gulf markets are watching the UAE to see if it too drops the dollar peg.

Gulf markets awaited any word from the United Arab Emirates central bank on Monday on whether it might change its currency policy, after Kuwait dropped its peg to the dollar and adopted an exchange rate based on a basket of currencies.

A UAE revaluation, seen as more likely after Kuwait's switch on Sunday, would make regional monetary union even more difficult by a 2010 deadline and send another bearish signal from Gulf oil exporters about outlook for the dollar.

"We shall be closely watching the UAE which should be the next one on the list," said Elisabeth Gruie, Emerging Markets Strategist at BNP Paribas in London.

Kuwait said the decline of the dollar, which hit a record low against the euro in April, had driven up inflation. This forced it to break ranks with fellow Gulf Arabs states which had pegged their currencies to the dollar to prepare for monetary union.

"A bigger question now is whether other Gulf states -- particularly UAE and Qatar, who have more visible inflation problems -- will follow suit," Citigroup analyst David Lublin said in a note.

Saudi Arabia, the largest Arab economy, and Qatar, Oman and Bahrain ruled out any changes to their pegs after Kuwait's announcement on Sunday. That left markets guessing about the position of the UAE, the sixth member Gulf Cooperation Council.

The office of UAE central bank governor Sultan Nasser al-Suweidi said he would not comment.

"A build up of speculative positions betting on further revaluations in the region seems very likely now," Lublin said in the note.

The UAE dirham is pegged at 3.67 to the dollar and was trading at 3.6721, a one-month high.

The UAE was named as the top revaluation candidate after Kuwait in a Reuters poll of analysts in March.

Like Kuwait, the UAE cut interest rates in April to deter speculators betting the central bank would allow the currency to appreciate as the dollar slid, making imports from Europe and some other countries more expensive.

Suweidi first raised the prospect of a currency revaluation in an interview with Reuters in January, although he has repeatedly said he would not act alone.

"The UAE has said it won't move unilaterally, but now it wouldn't be (acting) unilaterally," said Steve Brice, chief Middle East economist at Standard Chartered Bank in Dubai.

Kuwait cited the diminishing prospect of meeting the 2010 deadline for a single currency as one factor behind its decision to drop the dollar peg, adopted in 2003 to create a platform regional economic integration.

Qatar central bank governor Sheikh Abdullah bin Saud al-Thani said monetary union was still on the table, although the timetable was not crucial. "For me, while timing has value, it is more important to do it right," he told Reuters.

The dollar's slide over the past two years has been partly driven by concerns that the central banks would move assets away from the U.S. currency.

The UAE central bank said last year it was looking to move at least 10% of its foreign exchange reserves away from the dollar.

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