Gulf States Are Considering Dropping Currency Pegs (Update1)

Gulf States Are Considering Dropping Currency Pegs (Update1)

By Fiona MacDonald and Matthew Brown

May 1 (Bloomberg) -- Gulf states are considering dropping their currencies' pegs to the dollar, Kuwait Finance Minister Mustafa al-Shimali said.

``Yes, there are some'' Gulf Cooperation Council states considering dropping their dollar pegs, al-Shimali said in an interview late yesterday. ``Some countries will do what we are doing.''

Al-Shimali didn't specify which countries might end their pegs. The Kuwaiti dinar has appreciated 7.9 percent against the dollar since it dropped its peg to the U.S. currency in May last year

Gulf states are under pressure to revalue their currencies against the dollar after the U.S. currency lost 13 percent of its value against the euro in the last 12 months, stoking record inflation in the region. Speculation of a change in their currency systems eased this month after the two leading candidates, U.A.E. and Qatar, ruled out a revaluation or dropping the dollar peg.

``Inflation is rising in the Gulf to a great extent because of loose monetary policy,'' said Marios Maratheftis, head of research for Standard Chartered Plc. in the Middle East in a telephone interview from Dubai. ``Tightening monetary policy can only happen if they drop their currency pegs or strengthen the currency, preferably both.''

The inflation rate has neared 10 percent in Saudi Arabia and the U.A.E. in recent months, while consumer prices in Qatar rose 14 percent in the fourth quarter. Inflation accelerated to 9.5 percent in January as the cost of housing and food increased.

The idea of dropping the peg ``has been started by other Gulf countries and they are partially going this way because the dollar has been going down for some time,'' Shimali said.