Jan. 3 -- The United Arab Emirates will keep the dirham's 30-year link to the dollar after completing a review of its currency regime, said central bank Governor Sultan Bin Nasser al-Suwaidi.
``In 12 months I can say to you that the U.A.E. will maintain the peg,'' al-Suwaidi said in an interview in Abu Dhabi today. ``We have come to the conclusion that the inflation problem does not lie with the peg against the U.S. dollar.''
Gulf states, including the U.A.E., are under pressure to revalue or loosen their ties to the dollar after the U.S. currency fell 10 percent against the euro last year, raising the cost of imports. The exchange rates have come under greater strain after the U.S. Federal Reserve began cutting interest rates in September to avert a recession, forcing Gulf states to follow suit, even as they try to ease pressure on prices.
Al-Suwaidi had said on Nov. 15 that the falling dollar may trigger a review of the peg, causing forward contracts to buy dirhams in one year to jump the most in at least 10 years to 3.58 per dollar, a 2.8 percent premium over the spot price. The dirham is fixed to the dollar at 3.6725.
``We were studying the causes of inflation and we came to the conclusion that the causes are not in the dirham/U.S. dollar peg, therefore we need not do anything on that front,'' al-Suwaidi said today.
Euro Reserves
Al-Suwaidi said at the end of 2006 that the central bank would have converted 10 percent of its dollar reserves into euros by September 2007. The rapid appreciation of the euro was a ``hindrance'' to buying the European currency and contributed to the central bank missing that target, al-Suwaidi said today.
U.A.E. inflation accelerated to a record 9.8 percent last year from 9.3 percent in 2006, according to the median forecast of seven economists surveyed by Bloomberg.
Only a third of that inflation is due to the weaker dollar, al-Suwaidi said. The rest can be accounted for by rents, because of a shortage of housing and office space, he added.
Kuwait became the first Gulf Arab state to drop its currency's peg to the dollar in May last year when it began linking it to a basket of currencies including the euro, the yen and the British pound. After dipping in June and August, Kuwaiti inflation jumped to a record 6.2 in September.
``It means the causes of inflation are not in the monetary policy,'' al-Suwaidi said today of Kuwait's rising inflation. ``It is somewhere else.''
The central bank governors of Saudi Arabia, Qatar, Oman and Bahrain have all said that they have no intention of revaluing their currencies or dropping their pegs to the dollar.
