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UAE Raises Rates after Brief Warning to Speculators - ASHARQ AL-AWSAT English Archive
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DUBAI, (Reuters) – The United Arab Emirates central bank raised key interest rates by five basis points on Tuesday, a day after cutting them by that amount to deter speculators betting on an appreciation of the dollar-pegged dirham currency.

The bank raised the one-week certificate of deposit rate to 4.85 percent and the one month certificate of deposit rate to 5.05 percent.

There was no immediate comment from the central bank, which usually shadows policy moves by the U.S. Federal Reserve.

Analysts said Monday’s surprise cuts had been meant as a signal to speculators rather than a shift in policy.

“This is a just a first warning. If they continue the central bank could cut further next time and for longer,” said Faud Zeidan, head of treasury and investment at Union National Bank in Abu Dhabi.

The cuts were a short-term measure to curb large inflows of funds that were putting pressure on the dirham to appreciate and policy would revert to tracking the Fed once the pressure eased, a central bank official said on Monday.

Neither rate move had an impact on the spot market for the dirham which is pegged at 3.67 to the dollar, said Rohith Kedia, manager for money markets at Emirates Bank in Dubai. The currency was trading at 3.6717/20 at 0752 GMT.

Speculation about a currency revaluation has been gathering momentum in the buildup to a meeting of Gulf Arab central bank governors in Saudi Arabia on Tuesday and Wednesday.

Markets are watching the meeting for signals on the timetable for monetary union, which Kuwait, Saudi Arabia, the UAE, Oman, Qatar and Bahrain have agreed to complete by 2010.

All six states have pegged exchange rates to the dollar to prepare for a single currency.

Markets first began betting on a currency revaluation in the region as the dollar fell around 10 percent against the euro last year, making some Gulf imports more expensive and fuelling inflation.

Speculation grew after Oman said it would not make the 2010 deadline for a single currency, and it reached fever pitch in January when the UAE central bank raised the prospect of a region-wide revaluation after the meeting in Medina, Saudi Arabia, this week.

The UAE and Kuwait are the two countries seen as most likely to revalue, according to a Reuters poll of 15 analysts last month.

Kuwait’s central bank warned last week that it could move to quell speculation in the dinar and followed up by cutting the repurchase rate and intervention rate on Sunday and Monday to ease pressure on the currency.