Gulf not ready to pull trigger on currency reform

By Daliah Merzaban - Analysis

DUBAI (Reuters) - No matter how convincing a case a sinking dollar, soaring inflation and U.S. interest rate cuts may appear to make for Gulf Arab currency reform, the oil producers are not quite ready to tinker with their dollar pegs.

Concerns over the future of their dollar assets, fears about what a move would mean for their alliance with Washington and questions over how effective any new currency regime would be in controlling inflation are forcing central banks to tread softly.

With Gulf states preferring to act together on currency policy as they prepare for monetary union, investors betting on revaluations could find they have to wait a year or more before they are vindicated.

"I don't think that change is imminent," said Simon Williams, regional economist in Dubai at HSBC. "Some states may be persuaded by arguments for change but I don't sense that they are on the brink of acting."

Speculation that Saudi Arabia and four neighbors would ditch fixed-exchange rates has been mounting since Kuwait severed its dollar peg in May to contain inflation.

Since then case for currency reform has only grown stronger.

The dollar has extended a record-breaking slide on global markets, plunging more than 16 percent against the euro and almost 13 percent against a basket of major currencies since Kuwait's May 20 move, driving up the cost of many Gulf imports.

Inflation has surged across the region, almost doubling in five months in Saudi Arabia to a 27-year high of 8.7 percent in February. The combination of rising prices and falling purchasing power triggered riots by migrant workers in the United Arab Emirates and Bahrain.