DUBAI (Reuters) – Gulf currencies rallied on Monday after United Arab Emirates policymakers called for a regionwide review of dollar-pegged exchange rates and Saudi Arabia signalled it could be willing to discuss reform.
The Saudi Arabian riyal hit a new 21-year high on the fist international trading day since a source familiar with Saudi currency policy told Reuters that the world’s largest oil exporter could consider revaluing its dollar-pegged currency.
Investors in forward markets bet the riyal and UAE dirham would appreciate 1.43 percent and 3 percent respectively in a year’s time, expecting that Gulf Arab oil producers will unshackle their currencies from the tumbling dollar as Kuwait did in May.
Kuwait’s dinar has appreciated 4.69 percent against the dollar since it started tracking a currency basket on May 20, blaming the greenback’s slide for driving up the cost of imports.
UAE Central Bank Governor Sultan Nasser al-Suweidi said last week he too could start tracking a currency basket including the euro, but would only act along with Saudi Arabia and three other oil producers preparing for monetary union as early as 2010.
The UAE is under mounting social and economic pressure to drop the peg, Suweidi told Reuters on Thursday in an interview that drove the dirham to five-year high.
Political and business leaders in the UAE, the second-largest Arab economy, are discussing possible changes to the dollar-peg policy, said Omar bin Sulaiman, governor of the Dubai International Financial Centre.
“The decision has not been made,” bin Sulaiman, who leads financial services strategy in Dubai, told Reuters when asked whether a UAE revaluation was a foregone conclusion.
“There have been talks across the private sector and government and decision-makers in the UAE,” bin Sulaiman said.
The UAE, the world’s sixth largest oil exporter, is under the greatest pressure to review foreign-exchange policy, with the dollar hitting a record low against the euro, a 26-year trough against sterling and an 18-month low against the yen this month.
Businesses are complaining about rising costs and migrant construction workers rioted in Dubai this month to demand a pay rise to compensate for savings lost due to the dollar’s slide.
“Now is the time to reconsider whether it’s viable to continue to peg the local currency to the dollar,” said Abdul-Aziz al-Ghurair, head of the UAE’s Federal National Council, which advises the government on laws.
Any change should be agreed with other Gulf States, he said.
Saudi Arabia, the world’s largest oil exporter could revalue the riyal but will not drop the dollar peg to track a currency basket, the source said on Friday, communicating the Saudi response to market expectations of a Gulf exchange-rate shift.
Saudi officials including the central bank governor and finance minister have repeatedly ruled out changing the riyal’s exchange rate, which was fixed at 3.75 to the dollar in 1986.
There has been no change in Saudi currency policy, Central Bank Governor Hamad Saud al-Sayyari was quoted on Monday as saying in al-Eqtisadiah newspaper.
Some Gulf States could change currency pegs unilaterally if they fail to clinch a regional deal, Dubai’s bin Sulayem said during a panel discussion earlier on Monday.
Bids on the riyal were as strong as 3.7050 at 0750 GMT, their highest since the riyal’s rate was set in June 1986.
At 0830 GMT, bids on riyal forward rates were for an appreciation of 1.3 percent to 3.70 per dollar in a year. Bids had hit as strong as 3.6965, a 1.43 percent rise, earlier.
Bids on one-year forwards for the United Arab Emirates dirham were pricing in a rise of more than 3 percent to 3.5615 per dollar at 0840 GMT. The dirham spot rate is fixed at 3.6725 by the central bank.
Investors around the Middle East shifted bank deposits into dirhams, betting on an appreciation of the currency, Emirates Bank International Ltd said on Sunday.