Pressure mounts to drop UAE peg

Dubai: The UAE is under mounting social and economic pressure to unshackle its dirham from the tumbling dollar and track a currency basket including the euro to contain inflation, the central bank governor said.

The UAE would agree any policy shift with five other Gulf nations, although a decision would not necessarily wait until an annual summit of regional leaders, Sultan Bin Nasser Al Suwaidi said by telephone from South Korea.

"There is pressure, strong pressure, in the UAE because of higher inflation and an expected further deterioration in the dollar," Al Suwaidi said.

"The US regulators are really taking decisions that suit the economic conditions in the United States, which are not necessarily suitable for our economic conditions," he said. "We don't have the same issues, like the subprime and mortgage defaults."

Concerns about slowing US economic growth after a mortgage market crisis have driven the dollar to a 26-year trough against sterling, an 18-month low against the yen and a life low against the euro.

Dollar pegs force Gulf central banks to track US monetary policy to maintain the relative value of their currencies, at a time when the Federal Reserve is cutting rates and inflation in the Gulf is running at decade highs.

"We are more concerned about inflation here and the cross interest rates between the dirham and the dollar," Al Suwaidi said.

Saudi Arabia's refusal to match a September Fed cut helped drive the euro to a then record $1.40 as markets bet the world's biggest oil exporter would drop the riyal's peg, reducing demand for US assets in a region with a $1 trillion in surplus funds.

Al Suwaidi repeated his position that the UAE would not break ranks with its neighbours as Kuwait did in May when it switched from a dollar peg to a currency basket, saying the greenback's weakness was making some imports more expensive.

The leaders of Gulf states could decide to change currency policy at any time instead of waiting for an annual summit, such as one scheduled for December, he said.

"It depends on when Their Majesties meet. They could meet at any time," Al Suwaidi said.

Forward rates showed investors expected the dirham to appreciate around 2.7 per cent to 3.5726 per dollar in one year.

"It means they have projected the mix of the basket," Al Suwaidi said, adding that the basket would consist mainly of dollars and include the euro.

"It is difficult to predict the numbers when you don't know the content of the basket," he said.