UAE cautions markets against betting on dirham revaluation

Dubai/Manama: The UAE warned markets against betting on a dirham revaluation as investors piled pressure on the region's dollar pegs, expecting Gulf states to change currency policy at a summit this week.

The UAE was able to withstand pressure from speculators who drove the dirham to a 17-year high on Friday, the Al Khaleej newspaper quoted Central Bank Governor Sultan Bin Nasser Al Suwaidi as saying, echoing a warning from Bahrain's central bank.

In remarks carried by the Al Khaleej newspaper, Al Suwaidi moved to quell investor expectations that a change was imminent.

"Their speculation will not yield the gains they expect," Al Suwaidi said.

Bahrain's central bank threatened to take action against anyone betting on dinar appreciation and accused foreign banks of spreading revaluation rumours, the Middle East Economic Digest reported after an interview with Governor Rasheed Al Maraj.

Kuwait's central bank also warned investors against speculating on a revaluation in March. In May it dropped the peg to the dollar saying the greenback's slide was fuelling inflation by making some imports more expensive.

Al Suwaidi said the UAE central bank was not "currently" considering dropping the peg and any decision would be made by the government with other Gulf oil producers preparing for monetary union as early as 2010.

Gulf rulers meet in Qatar tomorrow and Tuesday.

A new certificate of deposits auction allows the UAE Central Bank to fend off speculators.

The central bank, which has no benchmark interest rate, uses the yield on the certificates to guide interbank lending.

On Wednesday, it stopped selling certificates at fixed rates and started auctioning them, allowing the yield to fall as demand for dirhams grew in hopes of a revaluation.

The bank also set its first repurchase rate last week, fixing its rate for lending to banks at 4.75 per cent.

Dollar pegs force regional central banks to track US monetary policy to avoid currency appreciation at a time when the Fed is cutting rates and Gulf inflation is at its highest this decade.