Analysts see UAE dropping peg first

Saudi Arabia and four other Gulf nations are likely drop their pegs to the tumbling dollar, with the UAE expected to move first, possibly in the next month, a Reuters poll showed on Thursday.
Although they are under similar pressure to switch from fixed pegs to a currency basket as Kuwait did in May, the five states are likely to move separately, diminishing chances of meeting a 2010 monetary union deadline, the poll showed.
The poll of 24 analysts across the Gulf and Europe showed a majority seeing the UAE as the most likely candidate for a shift in the currency policy followed by Qatar. The two countries have the region's highest inflation rates and have been most vocal after Kuwait about the impact on their economies of the dollar's slide to record lows on global markets.
The survey showed for the first time that most analysts believe Saudi Arabia, tipped as least likely to change currency policy in two previous polls, would also drop its peg.
"The Gulf countries are going through a new era, which requires a new FX regime," said Koceila Maames at Calyon, arguing dollar pegs have proved increasingly difficult to maintain.
UAE Central Bank Governor Sultan Nasser Al Suwaidi called this month for regional currency reform, complaining that the pegs forced Gulf central banks to track US monetary policy when their economies were out of step with the United States.
The UAE's dirham surged to a 17-year high and the Saudi Arabian riyal to a 21-year peak on Wednesday as investors bet that central banks would be unable to maintain their pegs to the dollar and fight inflation at the same time.
The Federal Reserve has cut borrowing costs by 75 basis points since September 18 to contain the fallout from a mortgage crisis, forcing Gulf banks to follow to prevent currency appreciation and ignore inflation running at decade highs.
Al Suwaidi said he would only move to a currency basket with Saudi Arabia and other members of the GCC, but the analysts in the poll said a co-ordinated policy shift is unlikely.
Tipping point
"The GCC wants to show unity, but the speculative pressures are different, which could be the tipping point that could force some members to act," said Mushtaq Khan at Citigroup.
"If the dollar continues to weaken, the GCC will de-peg. This point is critical," said Khan.
Of the 21 analysts who said the UAE would drop its peg to the dollar, 16 predicted a move before July and seven said it would happen in the next month.
Nineteen of 22 analysts expect Qatar to ditch the dollar peg, with 11 saying it will happen by the end of June, the poll showed.