Speculation mounts on dirham revaluation

Dubai: UAE-based banks and trading houses sold large quantities of dollars yesterday on heightened speculation that the UAE is likely to revalue the dirham.

Several bank treasuries confirmed yesterday that they were selling dollars as the chances of revaluation have increased.

"Banks seem to know something which others don't," said the treasury head of a leading Dubai based corporate house.

Treasurers confirmed the sustained buying saw the dirham bids climbing to a five year high of 3.6685 per dollar, the strongest since November 2002.

The UAE Central Bank did not comment on the heightened speculation.

"We still believe that the UAE is the country most likely to move next after Kuwait with regard to currency reform. We forecast a 15 per cent probability of the move this year, increasing to 40 per cent in 2008," said Monica Malek, an econ-omist with EFG-Hermes.

Although gains for dirham were not significant in the cross-currency exchange rates, the growing demand was viewed as an indication that the dirham is heading towards revaluation.

Analysts said yesterday that the refusal as many as four GCC states that have pegged currencies to follow the US rate cut is an indication that a revaluation could in the offing.

Scenario: Greenback tests sustainability of peg

• Although divergent monetary policies and the dollar peg have co-existed in the Gulf for quite some time, it is the first time a structurally weak dollar is testing the sustainability of the peg in the context of mounting inflation.
  
• The UAE and Qatar are facing unprecedented domestic inflation at 9.3 per cent and 11.3 per cent, respectively.
  
• Although the Kuwaiti dinar is not pegged to the dollar, Kuwait allowed its currency to appreciate 0.27 per cent on Sunday.
  
• Other GCC States so far have refused to cut interest rates, which have increased speculative buying in Saudi and Qatari Riyal. Oman yesterday denied any plans to cut interest rates.