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Sun 7 Aug 2011 02:05 PM

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UAE says no chance of dropping dollar peg

Neighbouring Gulf state Oman says sees no risk in investing in US treasuries

UAE says no chance of dropping dollar peg
Wall Street

The UAE will keep its currency peg to the US dollar even
after Standard & Poor's downgraded the world's biggest economy, and Oman
sees no risk in investing in US treasuries, officials said on Sunday.

Gulf central bankers were huddled in separate meetings on
Sunday to discuss the downgrade, sources said.

All Gulf Arab states, except for Kuwait, peg their
currencies to the greenback and their fortunes are closely tied to US
developments. Gulf states are also major investors in US treasuries.

"We are pegged to the dollar and will keep it. We don't
see the dollar collapse. Because the problem is not in the US only, but also in
the European markets," said Mohamed al-Tamimi, deputy executive director
at the UAE central bank's treasury department.

Ratings agency S&P cut the US long-term credit rating by
a notch to AA-plus in an unprecedented blow amid concerns about the nation's
budget deficits and climbing debt burden. It called the outlook
"negative," signalling another downgrade is possible in the next 12
to 18 months.

Tamimi said the downgrade was not unexpected but its timing
was earlier than anticipated. The central banker lent verbal support to the US
on Sunday, saying there was no alternative to investing in the US market which
still remained "the most liquid and a safe market".

The UAE central bank does not hold any US treasury bonds or
government financial instruments, it said in July.

"But if the yields go higher to a justified level,
there is no reason why we will not invest in US treasuries," Tamimi said
on Sunday.

The world's largest oil exporting region has an 'established
culture' in favour of the greenback, said National Commercial Bank chief economist
Jarmo Kotilaine in Riyadh.

"But we are at an inflection point in that this is
causing people to question the role for the dollar and the fundamentals of the US
economy," he said. "The road will take us where the dollar's role
will be reassessed."

Non-OPEC oil producer Oman said on Sunday it would stick
with US government instruments and make no "irrational decisions" in
the aftermath of S&P's cut.

"Let's say we are closely following the situation and
we don't want to make an irrational decision now," said a senior Omani
government official, speaking on condition of anonymity.

"In [the] global economic turmoil the world is going
through, what other alternative do we have at the moment but to stick with the US
government instruments?" he asked.

Kuwait is the only Gulf country which uses a currency basket
as a peg, though heavily dollar-weighted. It dropped the dollar peg in 2007 in
a bid to rein in inflation.

Policymakers in the Gulf Arab region have long said that
dollar pegs serve their hydrocarbon-heavy economies well as long as inflation
stays under control.

Central bank officials in Saudi Arabia, Kuwait and Bahrain
were not immediately available for comment.

"Saudi has $1.9 trillion invested in the US, mostly in
Treasury bills. How those are going to be affected, we don't know but we are at
the most risk among GCC markets," said a Riyadh-based fund manager who
asked not to be identified.

Gulf markets slumped on Sunday on investor jitters about the
the euro zone debt crisis as well as the US ratings action.

In Oman, the index fell 1.71 percent to a two-year low. But
Saudi Arabia, which slumped 5.5 percent on Saturday, steadied a day after
hitting a five-month low.

Group of Seven finance leaders were set to discuss the twin
issues in a conference call.

"There's always a risk on global growth when the
biggest economy in the world is going through a tough time," the Omani
official said.

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