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Dubai: Investors bet yesterday the United Arab Emirates dirham would appreciate by nearly three per cent in a year after the central bank said for a second time this week it could drop the currency's peg to the tumbling dollar.
One-year dirham forward rates have been climbing since UAE Central Bank Governor Sultan Nasser Al Suwaidi said in Tokyo on Tuesday the dollar's slide on global markets had pushed the world's sixth largest oil exporter to a "crossroads" on dirham's dollar peg.
The UAE could switch away from a "single currency peg to a multi-currency basket," although it would only move with other Gulf states preparing for monetary union as early as 2010, Al Suwaidi said on Tuesday.
Yesterday, he said a currency basket would consist largely of dollars. "It's not my prediction but everybody is expecting that the US dollar will go down further," Bloomberg News quoted Suwaidi as saying in an interview in Gwacheon, South Korea yesterday. "It will trigger a review."
The UAE would not drop the dollar but could "reduce it to a basket which will consist of more dollars, but not totally 100 per cent," he said, according to the report.
Suwaidi could not be reached for comment in South Korea.
Forwards appreciate
Yesterday one-year dirham forwards were at 3.5726 per dollar at 1240 GMT, an appreciation of 2.72 per cent. The central bank has fixed the dirham at 3.6725 per dollar and forward rates indicate where investors expect it to trade at a future date.
On Wednesday forward rates were pricing in a 2.3 per cent appreciation.
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.
Dollar pegs force Gulf central banks to track US monetary policy to maintain the relative value of their currencies, at a time when Federal Reserve is cutting rates and inflation in the Gulf is running at decade highs.
"Given that the main export of the region is priced in dollars, there is a strong case to be made for sticking with a dollar peg until the economies have become diversified away from energy," Standard Chartered said in a research note.
"But if that is the case then there will certainly be the need for a large revaluation, we calculate of the order of 20 per cent versus the dollar, and this needs to take place now," it said.
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