UAE to keep peg despite US go-ahead for currency reform

UAE to keep peg despite US go-ahead for currency reform

Khaleej Times - 29/05/2008

(MENAFN - Khaleej Times) Amid reports that US has given the green signal for the depegging of GCC currencies from a tumbling dollar, the UAE reaffirmed its stance on keeping its currency pegged to the greenback.

UAE Central Bank Governor Sultan Bin Nasser Al Suweidi, responding to remarks made by Merrill Lynch about a recent US Treasury report to Congress, said there was not any move or trend for a depeg or a revaluation.

Quoting the US Treasury report, Merrill Lynch has said the US gave the GCC the green light to change their foreign exchange policies, a move which will have far reaching impact on the currency valuations of the UAE and other Gulf countries. Al Suweidi was quoted by a local Arabic newspaper that the Merrill Lynch report was "weak and lacks transparency."

The report by the US Treasury to Congress on international economic and exchange rate policies, also known as the FX manipulation report, indicated that US has effectively given Gulf countries, reeling under imported inflation resulting from a depreciation of their dollar pegged currencies, the go ahead for making changes to their foreign exchange policies.

An analyst with Merrill Lynch has said the US is helping to lift the political barriers to exchange rate regime changes in the region. "Indeed, if the US were comfortable with the idea of GCC currency appreciation, we believe it would ultimately make it much easier for the GCC authorities to break the dollar peg from a diplomatic standpoint. This is supportive of our bullish view on the GCC currencies. We have re-entered our trade recommendation of a six-month forwards basket of long Kuwait dinar and UAE dirham versus short dollar."

In its report entitled "U.S. Green Light for the GCC," the investment bank said the UAE and Qatar will probably move to a currency basket in the next few months, with their respective currencies appreciating five percent before the end of the year.

According to Merrill Lynch, the US report highlights the rigidities in GCC currencies. "This represents a modest change in focus, but we believe a big signal for the currencies of the GCC. The report also highlights the increased comfort regarding the dollar. There had been market concerns that the US was reluctant to push the GCC countries into a change in currency regime given the possible negative effects on the greenback. This report suggests that those risks have lessened," ML said.

"The report has not cited any country as a manipulator since China in 1994. Studies show that being named is partly due to fundamentals but also to politics. Thus, we believe the new inclusion in the findings section of the report is important."

ML said: "With the US sending a green light for currency regime change, the focus may shift to domestic constraints. We recognise that there may still be some significant domestic resistance to exchange rate regime changes, but overall we believe that a number of GCC countries will ultimately be forced by the market to let their currencies strengthen."

The Treasury report highlighted the increase in inflation in GCC states which has intensified discussions in the region on revaluation or adjustments in currency rate regimes.

"As stressed in the Treasury report, some adjustment to real effective exchange rates in the region - especially in Qatar and the UAE - is taking place through rising prices. The root causes of inflation in the GCC are multiple, including higher food prices, strong demand pressures and abundant domestic liquidity.