U.A.E. May Drop the Dollar

By Seyoon Kim and Matthew Brown
Bloomberg
Nov. 18, 2007

Nov. 15 (Bloomberg) -- The United Arab Emirates may link the dirham to a basket of currencies, ending its 30-year-old peg to the dollar, central bank Governor Sultan Bin Nasser al-Suwaidi said.

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 the emirates may drop the dirham's link to the U.S. currency. Policy makers are considering whether to shadow a basket of currencies consisting mainly of dollars, he said.

A switch by the federation of sheikhdoms would follow Kuwait, which ended the fixed exchange rate for the dinar in May. The dollar has fallen 10 percent against euro this year, making imports for the Gulf Arab states more expensive and helping push inflation in the U.A.E. to the second-highest level in the region.

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

Al-Suwaidi has previously said any move away from the dollar peg would be in unison with its GCC neighbors, including Saudi Arabia, Qatar, Bahrain, Oman and Kuwait.

On Nov. 13, he said in a speech in Tokyo that the U.A.E. had ``reached a crossroads now with a further deterioration in the U.S. dollar and expected further weakening of the U.S. economy,'' according to a Reuters report.

GCC Meeting

Heads of the six GCC member states will meet Dec. 3-4 in Qatar to discuss monetary policy and regional security. Qatar, Oman, Bahrain and Saudi Arabia have said they have no plans to change their exchange rate policies.

Forward contracts to buy U.A.E. dirhams in one year jumped the most in at least 10 years to 3.58 per dollar, a record, and a 2.8 percent premium over the spot price, according to data compiled by Bloomberg.

Contracts to buy Saudi riyals also increased by the most in at least 10 years today, to 3.69 to the dollar, a 1.2 percent premium on the spot price.

The dollar slid to a record low of $1.4752 against the euro on Nov. 9 and has fallen versus 15 of the 16 most actively traded currencies tracked by Bloomberg in the past 10 1/2 months.

Concern is growing that the dollar's weakness may augur the end of the U.S. currency's 62-year reign as the world's main international currency for trade, financial transactions and central-bank reserves.

Sovereign Funds

Gulf Arab states include the emirates and Saudi Arabia, which together earn more than $1.2 billion a day from oil sales. A move away from the dollar may see the countries' sovereign wealth funds, which hold an estimated $2 trillion, diversify their holdings.

``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.

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 dinar has risen 4.5 percent versus the U.S. currency since then.

The U.A.E, which only reports annually, said its inflation was a record 9.3 percent last year.

Inflation in Qatar is the highest. It was 12.8 percent in the second quarter, after reaching a record 14.8 percent in the first three months of the year.

Saudi Arabia and Oman also reported record inflation in August.