Dollar fall piles pressure on Gulf Arab states-IIF

WASHINGTON Jan 16 (Reuters) - An oil-driven boom in Gulf Arab states shows few signs of abating, but pressure is mounting on some of them to revalue their currencies and others perhaps to abandon dollar pegs due to dollar weakness, a top bank lobby group said on Wednesday.

The Washington-based Institute of International Finance, the largest lobby for 375 of the world's major banks and investment institutions, said it did not expect a "wholesale abandonment" of dollar pegs.

"But revaluation of existing rates by some key countries is a possibility," the IIF added.

The Gulf Cooperation Council (GCC) is a loose economic and political alliance of six Gulf Arab states, including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, which make up about 40 percent of world oil reserves. Five of the six countries have their currencies pegged to the dollar.

"These countries are undergoing economic boom, very rapid credit growth and to address these issues they would need to tighten monetary policy and they are hamstrung by the dollar peg," said George Abed, director of the IIF's Middle East and Africa Department.

Abed, a former central bank chief of the Palestinian Authority and a former International Monetary Fund senior official, said liquidity growth and supply bottlenecks had pushed inflation higher in the region, which had become more troubling to the authorities recently.

"If the inflation rate continues to go up and if the situation with respect to the dollar and U.S. monetary policies continues, pressures will build up within the GCC to ... either have a one-off revaluation or to shift to a currency basket," he said.

Abed said he could not speculate how GCC countries would deal with the currency situation, but "we do analytically see some pressures building up."

GROWING ASSETS

The IIF said GCC countries' net foreign assets were "quite likely" to top $2 trillion at the end of 2008, up from $1.8 trillion in 2007, with most controlled by central banks and other government agencies.

As growth in industrialized countries slows, Abed said the GCC region would not be affected mainly because of high demand for oil and would not be dented by credit and financial turmoil that sprang from U.S. housing troubles.

The IIF found few signs GCC countries were diversifying significantly away from dollar assets amid the U.S. currency's decline. Past booms in the region saw GCC countries investing heavily in sovereign bonds, mostly in the United States.

"There has definitely been a trend away from sovereign fixed income securities in the direction of a larger share in equities and now more recently investments similar to those made by private equity funds," Abed said.

Whatever diversification away from dollar assets there has been has not been significant, he added.

"I have no doubt the future will be marked by further diversification in those directions but these are fairly conservative central banks as well as national asset management authorities and they are not likely to make any sharp breaks," he said. (Editing by Braden Reddall)