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Dubai: A potential revaluation of Gulf currencies including the UAE dirham appears closer to reality as more Gulf states are now admitting to the domestic economic compulsions they face due to the slumping dollar.
Reuters on Saturday quoted unnamed Saudi sources as saying that Saudi Arabia could consider revaluing the riyal along with other Gulf oil producers, but has no plans to drop its peg to the dollar.
Although UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi has reiterated that no unilateral action will be taken on exchange rate policy, analysts said surging domestic inflation and huge losses incurred by the government and private businesses due to the falling dollar will eventually compel the country to either revalue or depeg.
"We had originally forecast that the most probable timing for a unilateral UAE move would have been the second half of 2008 or early 2009. However, we now believe that the probability of a move in the second half of 2008 has increased markedly," said Monica Malek, an economist with EFG Hermes.
Currency market expectations flared up last week when Al Suwaidi said the country could consider replacing the current fixed peg in favour of a currency basket.
However, according to reports, Saudi Arabia is favouring revaluation while continuing to peg its currency to the dollar.
Analysts expect Saudi Arabia's new stand of a revaluation within the currency peg to provide a new policy platform for GCC countries to rally around and make their exchange rate regimes more aligned and flexible.
"A revaluation of the GCC currencies is needed now and the region should begin preparations to shift their currencies away from a peg to the dollar to managing their currencies against a basket of currencies with which the Gulf trades," Standard Chartered Bank said in a report.
According to the report, given that oil, the region's main export, is priced in dollars, there is a strong case to be made for sticking with a dollar peg until the economies diversified - or certainly diversify further - away from energy. If that is the case, there will certainly be a need for a large revaluation of up to 20 per cent versus the dollar, now.
Faced with the prospects of further plunge in the value of the dollar and a further drop in interest rates, the Gulf states are expected to allow a creeping appreciation of their currencies, starting with modest gains against the dollar.
Trends: Plunging greenback
The plunging dollar, struggling to find a bottom on a trade-weighted basis, has depreciated by more than eight per cent since the beginning of the year and by 20 per cent in real terms since the beginning of 2002.
The dollar depreciation appears likely to continue - perhaps aided by a Federal Reserve that is more focused on preventing a recession than on defending the currency.
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