Gulf states 'will revise peg this year'

Dubai: Gulf states including Saudi Arabia and the United Arab Emirates will be forced to revalue their currency pegs this year following the dollar's declines and the Federal Reserve's interest-rate cuts, said Bear Stearns.

Five Gulf nations lowered interest rates last week in step with the US to keep their links to the dollar even as inflation accelerated. When Saudi Arabia left rates unchanged after the Fed's September 18 reduction, the riyal rose to a 20-year high.

"It's going to be very difficult for central banks in the region to have adequate control of monetary policy, and hence inflation, when the Fed is slashing rates left, right and centre and the dollar is slumping,'' Steven Barrow, chief currency strategist in London at Bears Stearns, wrote in a client note.

Inflation

Inflation accelerated to records in all six Gulf Cooperation Council, or GCC, states last year as the oil-rich nations sought to preserve their dollar links. The regional average was 6.3 per cent in 2007, compared with 0.3 per cent in 2001, according to Merrill Lynch & Co.

The Fed cut its target rate for overnight bank lending by 1.25 percentage points in January to prevent the housing slump from pushing the world's biggest economy into a recession.

The US Dollar Index traded on ICE Futures in New York, which tracks the currency against six major counterparts, dropped 0.7 per cent last week to 75.45. It was at 74.48 on November 23, the weakest level since the gauge started in 1973.

"The only way out, unless the Fed reverses course soon or the dollar soars, is to adjust the currency regime with either a free float, revaluation or the adoption of a currency basket,'' Barrow wrote.