Saudi Arabia and neighbours, preparing for monetary union, agreed this month to keep their currencies shackled to the dollar after Kuwait broke ranks and started tracking a currency basket. The UAE called last month for the others to follow suit.
"Revaluation of domestic currencies … is still an option on the table for central bank governors in Gulf countries," the London-based al-Hayat newspaper quoted UAE central bank governor Sultan Nasser Al Suweidi as saying.
But "the decision not to de-link Gulf currencies to the US dollar is final", he said, according to the paper.
Forward rates showed investors were expecting the dirham to appreciate 3.4 percent in a year and the Saudi Arabian riyal to rise about 1.6 percent in that time.
Suweidi triggered a spell of intense market speculation about the imminent demise of the Gulf’s fixed exchange rates, after he said last month he was under mounting social and economic pressure to sever the dirham’s dollar peg.
He backtracked on those remarks after Gulf rulers agreed at a summit in Qatar to retain the dollar pegs and keep any talks on currency reform secret. Suweidi said on December 5 the dirham’s exchange rate would not change for "the foreseeable future".
Suweidi is now the second policymaker since the summit to say Gulf government are considering allowing currencies to appreciate against the dollar, which hit a record low against the euro and a basket of major currencies last month.
Bahrain’s Foreign Minister Sheikh Khaled bin Ahmed al-Khalifa said on Dec. 8 that Gulf finance minister and central bankers will meet in days to discuss revaluations, but they had no plans to drop their pegs.
Sheikh Khaled’s version of Gulf currency diplomacy tallied with details given by a source familiar with Saudi foreign exchange policy who told Reuters last month Riyadh was willing to consider its first revaluation in 21 years to keep monetary union alive.
Any revaluation would be "small" and would be carried out in tandem with other Gulf states, the source said, ruling out severing the riyal’s peg to the dollar.
Suweidi has also always said he would only act in concert with other Gulf states.
Kuwait threw the monetary union plan into chaos in May when it started tracking a currency basket, saying the dollar’s slide was fuelling inflation by making imports more expensive.
The UAE raised expectations it would follow when it called last month for all Gulf states to track currency baskets, drawing a rebuff from Saudi Arabia.
Saudi Arabia, the largest Arab economy, has not changed the riyal’s rate since 1986. With the Gulf’s largest population, the kingdom ran budget deficits in the 1990s and fears a revaluation would cut the riyal value of dollar-denominated oil revenue.
