Gulf currencies up as dollar sinks

Dubai: Gulf currencies rose yesterday as the dollar hit a new record low against the euro, prompting speculation the region’s economies may revalue or drop their pegs to contain inflation. The dollar plunged to a new record low as the US government confirmed that American economic growth expanded at a sluggish 0.6 per cent in the fourth quarter. In mid-afternoon deals, the European single currency raced as high as $1.5185, beating the previous high of 1.5144 that was set the previous day. The greenback also fell to the new trough against the euro after Federal Reserve Chairman Ben Bern-anke signalled the prospect of more cuts to US interest rates on Wednesday, dealers said. Speculators prefer to hold currencies in countries where interest rates are rising or expected to rise in the hope they can increase their potential returns. Saudi Arabia’s riyal, which has been fixed at 3.75 to the dollar since 1986, hit as strong at 3.74 to the dollar. Investors were betting the UAE dirham would appreciate by 2.8 per cent in one year and 4.1 per cent in two years, according to forward rates. Kuwait let the dinar appreciate against the dollar for a second time, taking gains since the country dropped its dollar peg in May to more than six per cent for the first time. Inflation is becoming a growing concern across the world’s biggest oil-exporting region, where price rises hit a quarter century peak of seven per cent in Saudi Arabia and 13.74 per cent in Qatar in the fourth quarter, just off a record. Import costs Costs of Gulf imports denominated in euros have risen on average more than 20 per cent this year, said Elyas Al Gaseer, Middle East head of capital markets at Calyon. “They have come up with a lot of solutions but it seems that all of them won’t stop inflation unless they do something about the currencies,” he said. Oil prices near $100 per barrel would also make it easier for Gulf governments to revalue, adding to speculation they could change policy soon, he said. Dollar pegs restrict central banks’ ability to fight inflation by forcing them to shadow US monetary policy at a time when the Fed is cutting rates in an attempt to ward off recession. In contrast, Gulf econ-omies are surging on a near five-fold jump in oil prices since 2002. Meanwhile, US president George W. Bush yesterday reiterated his administration’s strong-dollar policy. “We believe in a strong dollar policy,” he said at a White House news conference, in response to a question about the weakness of the greenback. Some Gulf policymakers have voiced concerns about the status quo. Qatar is studying revaluing its riyal among options to fight inflation. Source : Agencies