Last Updated: Mon Dec 06, 2010 13:44 pm (KSA) 10:44 am (GMT)

Dollar peg still best choice for UAE: Central Bank

Sixty to 65 percent of the UAE trade is denominated in US dollars
Sixty to 65 percent of the UAE trade is denominated in US dollars

Pegging the United Arab Emirates' currency to the U.S. dollar is still the best choice for the Gulf oil-producing country, its central bank governor Sultan Nasser al-Suweidi said on Monday.

Suweidi's comments come after the UAE economy minister last week said Gulf countries should discuss whether to shift their currency pegs to a basket of international currencies instead of the dollar.

"Sixty to 65 percent of the UAE trade is denominated in U.S. dollars so it is important to keep our peg to the dollar," Suweidi told a news conference ahead of a summit of Gulf Arab rulers in the UAE capital of Abu Dhabi.

 Sixty to 65 percent of the UAE trade is denominated in U.S. dollars so it is important to keep our peg to the dollar 
Central Bank Governor Sultan Nasser al-Suweidi

"We have lots of investments in the U.S. and the U.S has deep markets for investing, so the dollar for us is the most important currency."

Periods of dollar weakness combined with higher inflation in the Gulf tend to revive questions about the viability of currency pegs to the U.S. dollar in the world's top oil exporting region.

Kuwait is the only Gulf oil exporter tracking a currency basket, after ditching the dollar peg in 2007.

The dollar recouped some losses on Monday from a renewed focus on U.S. monetary policy easing, pulling up off two-week lows against the euro.

Inflation in the Gulf is on the rise again as oil-based economies recover from last year's downturn and regional debt woes, but it is well below record double-digit highs seen in most countries in 2008.

"We have inflation under control and supervision. There is no issue here at all," Suweidi said.

"Inflation stemming from economic sectors ... like real estate ... has thank God now ceased to cause problems and therefore I think inflation will not return to the UAE for many years to come," he said.

GCC single currency

 Inflation stemming from economic sectors ... like real estate ... has thank God now ceased to cause problems and therefore I think inflation will not return to the UAE for many years to come 
Suweidi

UAE consumer prices climbed to an 18-month high of 1.9 percent in October, but pressures are muted due to the fallout from Dubai's debt woes. Inflation hit a record high of 12.3 percent in 2008, when the dollar peg came under pressure.

Forwards now price in 0.1 percent weakening in a year for the UAE dirham compared with 3.7 percent appreciation at the height of 2007 speculation that imported inflation would force the region to abandon its dollar pegs.

Suweidi also said the UAE's position on rejoining a planned Gulf monetary union was unchanged, indicating the world's third-largest crude exporter may come back to the project only after the single currency is launched.

"Nothing new under the sun. The Emirates is still on its position, we are giving our brothers the chance to speed up the process ... and (then) we see their experience," he said.

He declined to explain why the UAE is holding back.

The second-largest Arab economy withdrew from the project last year in protest at a decision to locate the joint monetary council in Saudi Arabia. UAE policymakers have been saying that rejoining was not on the table unless it is profitable.

Only Saudi Arabia, Kuwait, Qatar and Bahrain in the six-nation Gulf Cooperation Council remained committed to forming the long-delayed monetary union.

But the project, expected to be discussed at the Dec 6-7 summit, saw little progress this year with the euro zone debt crisis limiting its appeal.

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