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UAE in spotlight after Kuwait drops dollar peg
http://www.thenews.com.pk/daily_detail.asp?id=56973
http://www.thenews.com.pk/daily_detail.asp?id=56973
DUBAI: The United Arab Emirates central bank kept markets guessing on Monday on whether it might change its foreign exchange policy, after Kuwait dropped its dollar peg and adopted an exchange rate based on a basket of currencies.
A UAE revaluation, seen as more likely after Kuwaitâs switch on Sunday, would make regional monetary union even more difficult by a 2010 deadline and send another bearish signal from Gulf oil exporters about the outlook for the weak dollar.
Kuwait will now need to buy fewer US assets when it accumulates reserves to defend the exchange rate, although the impact on dollar would be negligible, Scandinavian bank Nordea said in a research note.
âIf other countries in the region will follow, however, we see a risk of a modest dollar weakening,â it said. After Kuwait, the UAE was the most likely candidate to loosen a dollar peg which the six oil producers had agreed would stay in place until monetary union, according to analysts polled by Reuters in March.
âWe shall be closely watching the UAE, which should be the next one on the list,â said Elisabeth Gruie, Emerging Markets Strategist at BNP Paribas in London. However, the office of UAE central bank governor Sultan Nasser al-Suweidi said he would not comment.
Kuwait cited its inflation rate, which touched 3.7 per cent in December and 5.5 per cent at the end of March, as the main reason for abandoning its dollar peg. With the dollar hitting a record low against the euro in April, Kuwaitâs central bank was forced to act in the ânational interestâ and break ranks with fellow Gulf Arabs states over the currency pegs, the central bank said on Sunday.
The UAE, where inflation hit 10 per cent at the end of last year, and Qatar, with record inflation of 11.83 per cent in 2006, had more reason to cushion their economies from the rising cost of imports, Citigroup analyst David Lubin said in a note.
Qatarâs central bank governor ruled any change of exchange rate policy on Monday. The central banks of Saudi Arabia, the largest Arab economy, Oman and Bahrain did the same on Sunday.
âA build up of speculative positions betting on further revaluations in the region seems very likely now,â Lubin said in the note. The UAE dirham hit a one-week high of 3.6710 per dollar compared with its official peg of 3.67275. The Saudi riyal touched a six-week high at 3.7498 per dollar, just off its official 3.75 per dollar peg.
Like Kuwait, the UAE cut interest rates in April to deter speculators betting that the central bank would allow the currency to appreciate as the dollar slid. Suweidi first raised the prospect of a currency revaluation in an interview with Reuters in January, although he has repeatedly said he would not act alone.
âThe UAE has said it wonât move unilaterally, but now it wouldnât be acting unilaterally,â said Steve Brice, chief Middle East economist at Standard Chartered Bank in Dubai. Kuwait also cited the diminishing prospect of meeting the 2010 deadline for a single currency as one factor behind its decision to drop the dollar peg, adopted in 2003 to create a platform regional economic integration.
...cool.......
