Arab Nations May Coordinate to Revalue, Standard Chartered Says
bloomberg.com
Jan. 16 (Bloomberg) -- Middle East central banks with fixed exchange rates to the dollar may opt for a ``coordinated'' revaluation to curb inflation should the U.S. currency weaken further, according to Standard Chartered Plc.
The Saudi riyal and the United Arab Emirates dirham may strengthen 8 percent by the end of the first quarter, Standard Chartered said in a report today. Kuwait dropped its dollar peg in May last year, whilst the other five members of the Gulf Cooperation Council continued their links with the U.S. currency.
``If we see further dollar weakness against the majors a coordinated revaluation by the GCC is possible,'' wrote Callum Henderson, head of global currency strategy, and Marios Maratheftis, head of research for the Middle East.
The U.A.E., Saudi Arabia, Bahrain, Qatar and Oman are under pressure to revalue or loosen their exchange rates after the dollar tumbled to a record low against a basket of six major currencies in November, making imports more expensive. Cuts to U.S. benchmark borrowing rates since September, that force Gulf states to follow suit, may spur inflation already at a record in the U.A.E.
Few Policy Tools
The U.K. bank forecasts the U.A.E. dirham rising to 3.38 per dollar and the Saudi riyal to 3.45 per dollar. They traded at 3.6729 and 3.7494 respectively today. Standard Chartered's Henderson, based in Singapore, confirmed the report in an e-mail.
The Gulf Arab states have few policy tools to temper price increases and may have to curb property market speculation if they don't revalue the pegs, Henderson and Dubai-based Maratheftis added.
The United Arab Emirates will keep the dirham's 30-year link to the dollar after completing a review of its currency regime, said central bank Governor Sultan Bin Nasser al-Suwaidi on Jan. 3. Rising rents because of a shortage of housing and office space are the prime cause of domestic inflation, he said.
Kuwait's dinar now trades against a basket of currencies including the dollar, euro and the British pound. The dinar has climbed 5.6 percent in the past six months, according to data compiled by Bloomberg.
Inflation in the U.A.E. accelerated to a record 9.8 percent last year from 9.3 percent in 2006, according to the median forecast of seven economists surveyed by Bloomberg.
``A move to a currency basket by the rest of the GCC would give it needed policy flexibility,'' Henderson and Maratheftis said. ``However, in practice, this seems unlikely, for political rather than economic reasons.''
The majority of businesses in the Gulf nations anticipate their local currencies to be revalued against the dollar in 2008, and about half would welcome the move, according to an HSBC Holdings Plc survey this month.
To contact the reporter on this story: Shanthy Nambiar in Bangkok at snambiar1@bloomberg.net |
