Gulf Arab currencies surge on revaluation report
The United Arab Emirates dirham surged to a 17-year high, leading a rally in regional currencies as investors piled pressure on Gulf Arab dollar pegs, encouraged by a report that a revaluation could come as early next week.
Central banks fought to deter bets on appreciation. Kuwait, the only Gulf oil producer that tracks a currency basket, let its dinar fall in twice in one day and the UAE pushed down interest rates at an auction that guides interbank lending.
Lower interest rates risk stoking inflation, which is at decade highs across the Gulf. Although central banks are cutting rates to defend their pegs, markets expect they will eventually give up and follow Kuwait's lead in unshackling currencies from the tumbling dollar to focus on fighting inflation.
"Central banks seem to be making a deliberate effort to reinforce the credibility of the current dollar pegs. We maintain our view that the dollar pegs are unsustainable over the medium term," Goldman Sachs said in a research note.
The Saudi riyalhit a 21-year high and the Qatar riyal a five-year high, extending a rally that began when UAE Central Bank Governor Sultan Nasser al-Suweidi called this month for Gulf central banks to switch from fixed pegs to a currency basket including the euro. The Dubai-based Arabian Business magazine threw oil on the fire on Wednesday, saying a UAE revaluation of 3-5 percent could come on the National Day holidays on Sunday and Monday or the Muslim holidays of Eid al-Adha, which begin around Dec. 20.
"The plan is to make an announcement when the banks are closed - National Day is an option, and if not National Day then the Eid holidays later in December," Arabian Business quoted a source close to the central bank as saying on its Web site.
The report's author, Anil Bhoyrul, told Reuters the source was not at the central bank.
A National Day revaluation is unlikely because it would coincide with a summit of Gulf Arab rulers in Qatar on December 3 and 4, analysts said.
"The amount the magazine is talking about is in the ballpark of what we are expecting. But I don't think they will do it before the summit," said Mushtaq Khan, economist at Citigroup Global Markets.
17-YEAR HIGH
Suweidi has repeatedly said he would only act in concert with other Gulf states preparing for monetary union as early as 2010. He and other central bankers say the final decision on currency policy would be made by Gulf Arab rulers.
Still, bids on the dirham were as high as 3.6600 per dollar, the strongest according to Reuters data going back to 1990. The currency, which has been fixed at 3.6725 per dollar since 1997, is on track to make its biggest one-day gain on record.
Bids on the Saudi riyal hit 3.6900 per dollar, the strongest since 1986, and bids on the Qatar riyal peaked at 3.6250 per dollar, the highest since November 2002.
With pressure mounting on their pegs, Gulf central banks have been cutting rates to make it less attractive for investors to hold local currency deposits in anticipation of an appreciation.
The central bank of Saudi Arabia, the world's largest oil exporter, cut its reverse repurchase rate by 50 basis points to 4.25 percent on Saturday.
The UAE central bank, which cut rates by as much as 20 basis points last week, stopped setting fixed rates on its certificates of deposit and started an auction on Wednesday.
With revaluation bets driving up demand for dirham deposits, an auction would result in lower interest rates. The UAE has no benchmark rate.
The central bank declined to release the results of the first auction. The one-week certificate of deposit rate fell 20 basis points to 4.2 percent and the one-year rate 15 basis points to 4.05 percent, bankers said.
In his call for currency reform, Suweidi complained that the dollar pegs forced central banks to track U.S. monetary policy when their booming economies are out of step with the United States. The Federal Reserve is cutting interest rates to contain the fall-out from a mortgage market crisis.
Kuwait, alone among Gulf states in having a flexible exchange rate, let the dinar fall twice in one day, the first time it has done so since it broke ranks with its neighbours and scrapped the dollar peg on May 20.
"This will minimise the ability to speculate on the dinar," said Abdul-Wahab al-Rushood, treasurer at Kuwait Finance House.
Kuwait let the dinar fall 0.1 percent against the dollar on Wednesday, saying it would trade around a mid point of 0.27420 per dollar. (Reuters)
Central banks fought to deter bets on appreciation. Kuwait, the only Gulf oil producer that tracks a currency basket, let its dinar fall in twice in one day and the UAE pushed down interest rates at an auction that guides interbank lending.
Lower interest rates risk stoking inflation, which is at decade highs across the Gulf. Although central banks are cutting rates to defend their pegs, markets expect they will eventually give up and follow Kuwait's lead in unshackling currencies from the tumbling dollar to focus on fighting inflation.
"Central banks seem to be making a deliberate effort to reinforce the credibility of the current dollar pegs. We maintain our view that the dollar pegs are unsustainable over the medium term," Goldman Sachs said in a research note.
The Saudi riyal
"The plan is to make an announcement when the banks are closed - National Day is an option, and if not National Day then the Eid holidays later in December," Arabian Business quoted a source close to the central bank as saying on its Web site.
The report's author, Anil Bhoyrul, told Reuters the source was not at the central bank.
A National Day revaluation is unlikely because it would coincide with a summit of Gulf Arab rulers in Qatar on December 3 and 4, analysts said.
"The amount the magazine is talking about is in the ballpark of what we are expecting. But I don't think they will do it before the summit," said Mushtaq Khan, economist at Citigroup Global Markets.
17-YEAR HIGH
Suweidi has repeatedly said he would only act in concert with other Gulf states preparing for monetary union as early as 2010. He and other central bankers say the final decision on currency policy would be made by Gulf Arab rulers.
Still, bids on the dirham were as high as 3.6600 per dollar, the strongest according to Reuters data going back to 1990. The currency, which has been fixed at 3.6725 per dollar since 1997, is on track to make its biggest one-day gain on record.
Bids on the Saudi riyal hit 3.6900 per dollar, the strongest since 1986, and bids on the Qatar riyal peaked at 3.6250 per dollar, the highest since November 2002.
With pressure mounting on their pegs, Gulf central banks have been cutting rates to make it less attractive for investors to hold local currency deposits in anticipation of an appreciation.
The central bank of Saudi Arabia, the world's largest oil exporter, cut its reverse repurchase rate by 50 basis points to 4.25 percent on Saturday.
The UAE central bank, which cut rates by as much as 20 basis points last week, stopped setting fixed rates on its certificates of deposit and started an auction on Wednesday.
With revaluation bets driving up demand for dirham deposits, an auction would result in lower interest rates. The UAE has no benchmark rate.
The central bank declined to release the results of the first auction. The one-week certificate of deposit rate fell 20 basis points to 4.2 percent and the one-year rate 15 basis points to 4.05 percent, bankers said.
In his call for currency reform, Suweidi complained that the dollar pegs forced central banks to track U.S. monetary policy when their booming economies are out of step with the United States. The Federal Reserve is cutting interest rates to contain the fall-out from a mortgage market crisis.
Kuwait, alone among Gulf states in having a flexible exchange rate, let the dinar fall twice in one day, the first time it has done so since it broke ranks with its neighbours and scrapped the dollar peg on May 20.
"This will minimise the ability to speculate on the dinar," said Abdul-Wahab al-Rushood, treasurer at Kuwait Finance House.
Kuwait let the dinar fall 0.1 percent against the dollar on Wednesday, saying it would trade around a mid point of 0.27420 per dollar. (Reuters)
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