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Gulf reviews currency peg
Central banks of Gulf Arab oil producers are reviewing foreign exchange pegs to the dollar and may agree as early as March to switch to another currency or basket of currencies, although they may yet take no action, the UAE Central Bank chief said yesterday.
- Reuters
- Published: 00:00 January 12, 2007
- Al Suwaidi said the governors could opt for more flexible exchange rates, instead of the fixed pegs.
- Image Credit: Gulf News archive
Abu Dhabi: Central banks of Gulf Arab oil producers are reviewing foreign exchange pegs to the dollar and may agree as early as March to switch to another currency or basket of currencies, although they may yet take no action, the UAE Central Bank chief said yesterday.
Gulf currencies ticked slightly higher yesterday, displaying only a muted reaction to news
Central bank governors of the six countries will meet in March in Riyadh to discuss currency pegs, Central Bank Governor Sultan Nasser Al Suwaidi said. "We might come up with a decision that says we are okay and stick to the same [regime], or we could come to the conclusion that we need to change," he said.
The GCC pegged their currencies to the dollar to prepare for monetary union in 2010. With the dollar having slid against the euro and imported inflation rising, policymakers are reviewing the currency pegs, Al Suwaidi said.
"Changing the peg is a GCC decision. We went into it together. We will go out of it together," he said.
The governors could opt for more flexible exchange rates, instead of the fixed pegs now maintained by all states except Kuwait, which revalued its currency last year, Al Suwaidi said. They may decide to peg to another currency or basket of currencies, he said. "Whether it should be fixed or fluctuating is one issue. Another is issue to change the currency of the peg," he said.
The dollar's slide last year to 20-month lows against the euro is driving up the cost of imports in the region.
"Imported inflation is one issue. International pressure is another issue," Al Suwaidi said. "The main factor is [currency] values, you have to adjust sometimes in a fixed peg. Your [currency] could be overpriced or underpriced."
Kuwait revalued its the currency in May for the first time in 17 months, allowing a one percent appreciation against the dollar. Around half of Kuwait's imports are denominated in euros and yen.
The move sparked a currency rally across the Gulf region, with markets betting that other countries, especially Saudi Arabia, would follow suit.
The UAE central bank has paused in its purchases of the euro because it believes the European currency is near its peak against the dollar, the central bank governor said.
The central bank plans to convert 10 per cent of its dollar-denominated reserves into euros by the end of the third quarter and will return to the market when the euro dips, Al Suwaidi said.
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