Thursday, November 15, 2007

UAE May Peg Its Currency to a Basket of Currencies

I think those countries that peg their currency to the US dollar are tired of getting creamed in the foreign exchange market when they go to trade with the Euro-zone or other countries. Text in bold is my emphasis. From Bloomberg:

The United Arab Emirates may consider pegging its dirham to a basket of currencies, consisting mostly of dollars, said central bank Governor Sultan Bin Nasser al- Suwaidi.

The falling dollar will trigger a ``review'' of the U.A.E.'s dollar peg, al-Suwaidi said in an interview in Gwacheon, South Korea today, signaling for the first time that the U.A.E. may drop the dirham's link to the U.S. currency in the near future.

Gulf Arab states, including the U.A.E and Saudi Arabia, that together earn more than $1.2 billion per day from oil sales, may deal the dollar a further blow as they move to stem imported inflation by revaluing their currencies. A move away from the dollar may see the countries' sovereign wealth funds, which hold an estimated $2 trillion, diversify their holdings.

``Today's comments reinforce our view that the dirham is the most likely currency to move away from its current U.S. dollar peg following Kuwait's move earlier this year,'' Caroline Grady, economist at Deutsche Bank AG, said in a telephone interview from London today. ``Although the U.A.E. has said that it doesn't intend to unilaterally abandon the long-held dollar-peg, we don't rule out a move without the rest of the Gulf Cooperation Council.''

The dollar has lost 10 percent of its value against the euro so far this year, dropping to a record low of $1.4752 on Nov. 9. The dollar has declined against all 16 most-active currencies tracked by Bloomberg in the past 10 1/2 months.

Al-Suwaidi has previously said that any move away from the dollar peg would be in unison with its GCC neighbors, including Saudi Arabia and Qatar. Heads of state from the six-nation council will meet Dec. 3-4 in Qatar to discuss monetary policy and regional security.

``It's not my prediction but everybody is expecting that the U.S. dollar will go down further,'' al-Suwaidi said today. ``It will trigger a review.''

The plan is ``not to drop the dollar-peg but maybe to reduce it to a basket which will consist of more dollars, but not totally 100 percent,'' he said.

The U.A.E. has the second-highest inflation in the Persian Gulf, caused, in part, by the rising cost of imports from Europe as the dollar has declined. Moving to a basket of currencies would end the dirham's peg to the dollar that began in 1978 and was formalized in 1997.

Kuwait dropped the dinar's peg to the dollar in May, citing inflationary pressure from the weak dollar.

The GCC is an economic and political grouping of Saudi Arabia, the U.A.E., Kuwait, Qatar, Oman and Bahrain. They all peg their currencies to the dollar, apart from Kuwait, which switched to a basket of currencies in May.

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