UAE to keep dollar peg after review: Suwaidi

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.

"In 12 months I can say to you that the UAE will maintain the peg,'' Al Suwaidi said in an interview in Abu Dhabi yesterday.

"We have come to the conclusion that the inflation problem does not lie with the peg against the US dollar."

Gulf states, including the UAE, are under pressure to revalue or loosen their ties to the dollar after the US currency fell 10 per cent against the euro last year, raising the cost of imports. The exchange rates have come under greater strain after the US Federal Reserve began cutting interest rates in September to avert a recession, forcing Gulf states to follow suit, even as they try to ease pressure on prices.

Al Suwaidi had said on November 15 that the falling dollar may trigger a review of the peg, causing forward contracts to buy dirhams in one year to jump the most in at least 10 years to 3.58 per dollar, a 2.8 per cent premium over the spot price. The dirham is fixed to the dollar at 3.6725.

"We were studying the causes of inflation and we came to the conclusion that the causes are not in the dirham/US dollar peg, therefore we need not do anything on that front,'' Al Suwaidi said yesterday.

Suwaidi said at the end of 2006 that the central bank would have converted 10 percent of its dollar reserves into euros by September 2007. The rapid appreciation of the euro was a hindrance to buying the European currency and contributed to the central bank missing that target, Al Suwaidi said yesterday.

UAE inflation accelerated to a record 9.8 per cent last year from 9.3 per cent in 2006, according to the median forecast of seven economists surveyed by Bloomberg.

Only a third of that inflation is due to the weaker dollar, Al Suwaidi said. The rest can be accounted for by rents, because of a shortage of housing and office space, he added.

Kuwait became the first Gulf Arab state to drop its currency's peg to the dollar in May last year when it began linking it to a basket of currencies including the euro, the yen and the British pound. After dipping in June and August, Kuwaiti inflation jumped to a record 6.2 in September.

"It means the causes of inflation are not in the monetary policy,'' Al Suwaidi said yesterday of Kuwait's rising inflation. "It is somewhere else." The central bank governors of Saudi Arabia, Qatar, Oman and Bahrain have said that they have no intention to drop their dollar pegs