UPDATE 2-UAE talks up FX reform, markets seize on Saudi shift

(Adds details, quotes, background)

By Daliah Merzaban and John Irish

DUBAI, Nov 19 (Reuters) - United Arab Emirates policymakers kept up pressure for a review of Gulf Arab dollar pegs on Monday and currencies rallied across the oil-exporting region on a signal that Saudi Arabia may be willing to discuss reform.

The Saudi riyal SAR= hit a 21-year high and investors bet on an appreciation of 2.4 percent in a year after a source familiar with Saudi policy told Reuters the world's largest oil exporter could consider its first revaluation since 1986.

Although the source ruled out dropping the peg in favour of a currency basket, he signalled that Riyadh, champion of the Gulf's fixed exchange rates, may respond to a dollar slide that has split a regional economic bloc and the OPEC oil cartel.

"That Saudi Arabia is prepared to admit in public that a revaluation could be one of the acceptable compromises, will increase pressure on Gulf currencies," Marios Maratheftis, head of research at Standard Chartered in Dubai said in a note.

Investors seized on the news. Retail customers scrambled funds into UAE bank deposits. Hedge funds pushed Bahrain's dinar BHD= to a 10-month peak and Oman's rial OMR= to a month-high as Omani inflation data underlined the Gulf's policy dilemma.

Inflation accelerated to a 16-year high of 7.09 percent in September as the cost of food, which Oman imports mainly from Asia and Europe, soared 14 percent.

Kuwait, one of six states preparing for monetary union as early as 2010, said the dollar's slide was fuelling inflation by driving up import costs when its dropped its peg in May to track a currency basket. The dinar has since gained a 4.69 percent.

The UAE, where inflation hit a 19-year high of 9.3 percent last year, said it could follow Kuwait's lead, partly because the peg was forcing the central bank to track U.S. monetary policy at time when the Federal Reserve is cutting rates. UAE Central Bank Governor Sultan Nasser al-Suweidi said last week he would only act along with Saudi Arabia and other neighbours, although there was mounting social and economic pressure for change.

RECONSIDER

As if on cue, UAE officials talked up the need for currency reform.

"Now is the time to reconsider whether it's viable to continue to peg the local currency to the dollar," said Abdul-Aziz al-Ghurair, head of the UAE's Federal National Council, which advises the government on laws.

The Abu Dhabi Chamber of Commerce recommended scrapping the peg in a report published in the Gulf News on Monday. State-sponsored Dubai Quality Group, a business forum, invited journalists to a discussion on currency policy.

"They are confusing the market and feeding into the speculative drive," said John Sfakianakis, chief economist at SABB, HSBC's Saudi affiliate.